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CREDITS 

COLLECTIONS 

&  FINANCE 


ORGANIZING  THE  WORK 

CORRECT  POLICIES  AND  METHODS 

FIVE  CREDIT  AND  COLLECTION 

SYSTEMS 


A.  W.  SHAW  COMPANY 

CHICAGO  NEW  YORK 

LONDON 


Copyright,  1914,  by 
A.  W.  Shaw  Company 

Copyright,  Canada,  1914,  by 
A.  W.  Shaw  Company 

Entered  at  Stationers'  Hall,  London 
A.  W.  Shaw  Company,  Ltd. 

Under  the  title  ^ 

•THE  LIBRARY  OF  BUSINESS  PRACTICE'*— Vol.  8 

Reprinted  1917 
Printed  in  U.  S.  A. 

£^Cononn/c}     JO^CCncJs 


CONTENTS 


I—ORGANIZING  CREDIT 
WORK  __ 


(^  Editorial   by  H.  P.  Davison 

I     Essentials  in  Credit  Management  .... 
By  Edward  M.  Skinner,  General  Manager,  Wilson 
Brothers 

II     The  Man  for  the  Credit  Desk       ....         2S 
By  F.  F.  Peabody,  President,  Cluett,  Peabody  H 
Company 

III  Commercial  Agency  Ratings  and  Methods     .        .         S2 

By  T.  J.  Zimmerman 

IV  Credit  Insurance 48 

By  T.  J.  Zimmerman 
V     When  and  How  to  Make  Collections    .        .        .  55 

By  Harlow  N.  Higinbotham,  President,  The  National 

Grocer  Company,    Formerly    Credit    Manager, 

Marshall  Field  and  Company 

II— CREDIT  POLICIES 

Editorial  by  David  B.  Forgan 65 

VI     Wholesale  Credits  and  Collections       ...         67 

By  Howard  R.  Huse 
VII      Credit  Problems  of  the  Manufacturer         .        •  78 

By  Berthold  E.  Borges,  of  Ederheimer,  Stein  & 
Company 

VIII     Retail  Credits 86 

By  J.  W.  McConnell,  Credit  Manager,  Carson,  Pirie, 
Scott  &  Company 

IX     Instalment  Credits 97 

By  E.  F.  Kennedy,  President,  The  E.  F.  Kennedy 
Furniture  Company 

X     Credits  and  Collections  ,  in  Foreign  Trade  .        .        103 
By  John  E,  Gardin,  First  Vice-President  and  Manager, 
Foreign  Exchange  Department,  National  City 
Bank  of  New  York 

III— DETAILED  CREDIT  AND 
COLLECTION  SYSTEMS 

Editorial  by  F.  H.  McAdow IH 

XI      How  A  Wholesale  House  Handles  Its  Accounts  .        IIS 
By  E.  F.  French,  Credit  Manager,  J.  V.  Farwell  & 
Company 


CONTENTS 


XII  How  A  jNIanufactuber  Handles  His  Accounts       .        119 

By  Alfred  Terrell,  Secretary,  The  Simmons 
Manufacturing  Company 

XIII  Systematizing  Retail  Credits         ,        .        ,        .        1S3 

By  T.  J,  Zimmerman 

XIV  The  Credit  System  of  an  Instalment  House      ,        148 

By  Henry  Marcus,  Secretary  and  Treasurer  of  the 
Marcus  and  Klemperer  Company 


IV— INVESTMENTS,  CREDIT 
AND  FINANCE 


SXlitorial  by  F.  B.  Anderson 

XV      Financing  a  New  Enterprise 

By  Henry  Clews  of  Henry  Clews  &  Company 
.XVI      Putting  Credit  Extensions  on  a  Sound  Basis 
By  Howard  R.  Huse 

XVII  The  Banker's  Credit  Viewpoint    . 

By  George  M.  Reynolds,  President,  The  Continental 
and  Commercial  National  Bank 

XVIII  Bank  Cooperation  on  Financial  Problems 

By  E.  B.  Kixmiller 
XIX     How  to  Choose  Investments 

By  Georere  Garr  Henry,  formerly  Vice-President, 
Guaranty  Trust  Company 

XX     Judging  the  Money  Market  .... 
By  George  Oarr  Henry,  formerly  Vice-President, 
Guaranty  Trust  Company 


151 
153 
161 
171 

176 

184 

192 


CREDIT  AND  COLLECTION  CHARTS 


TIGURE 

I      outlining  credit  department  work      .... 

FORM 

I     ledger  card  used  by  a  manufacturing  house    . 
filing  customers'  reports  and  ratings 

AN  order  blank   USED   BY   A   MANUFACTURING   HOUSE 

instalment   HOUSE   ORDER   BLANKS: 

THE  salesman's  ORDER,   THE    DRIVER's    COPY, 

THE   OFFICE  COPY 

LEDGER  AND    COLLECTOR'S  CARDS  FOR  INSTALMENT  ACCOUNTS 

QUESTIONS  THE   BANK   ASK3   LOAN    APPLICANTS 


II 
III 
IV 


11 

122 
123 

127 

14A 
147 
166 


ESSENTIALS  IN  CREDIT 
MANAGEMENT 

By  Edward  M.  Skinner 
General  Manager,  Wilson  Brothers 

CREDIT  is  the  name  given  to  that  business  opera- 
tion by  which  delivery  of  money,  merchandise  or 
other  consideration  is  made  on  the  promise  of  future 
payment.  Credit  is  based  on  confidence;  confidence 
in  a  man's  resources  and  ability  to  pay,  in  his  char- 
acter" and  integrity;  confidence  in  the  stability  of  the 
locality  in  which  he  conducts  his  business,  in  the 
country  itself;  confidence  in  the  strength  of  its  gov- 
ernment and  the  soundness  of  its  finances.  Credit-mak- 
ing is  an  estimate  or  opinion  of  future  commercial  con- 
ditions and  of  the  ability  and  intention  of  business  men 
to  carry  out  their  business  contracts. 

The  man  who  pays  cash  uses  the  profits  made  from 
past  business  conditions;  the  man  who  buys  on  credit 
anticipates  the  profits  of  the  future;  hence  the  man 
who  sells  on  credit  must  foresee  the  business  conditions 
which  are  to  bring  these  profits. 

Credit-malving  can  no  longer  be  done  on  the  old 
mathematical  basis,  nor  with  the  old  sweat-box  methods. 
The  scope  of  credit  operations  has  so  widened,  credit- 
giving  and  credit-taking  have  become  so  common,  that 
no  man  is  sot  weak  that  he  must  stand  brutal  inquisi- 
torial questionings  into  his  most  private  affairs,  no 
house  so  strong  that   it  can  afford  to  have  an  openly 


10 DEPARTMENT    ORGANIZATION 

cold-blooded  and  harsh  maji  in  its  credit  department, 
who  will  antagonize  customers  and  repulse  trade.  The 
object  of  the  credit  man  is  in  the  main  that  of  the  whole 
selling  end  of  a  business :  to  sell  goods  at  a  profit. 

The  credit  man  comes  into  more  intimate  contact  with 
the  customers  of  a  house  than  any  other  man,  his  re- 
lations are  most  delicate,  he  touches  a  man  where  he  is 
most  sensitive — on  the  question  of  his  character  and  his 
ability.  He  must  be  pre-eminently  a  man  who  can 
handle  people,  who  can  reach  their  real  selves.  Anyone 
can  get  information  of  a  certain  kind  by  asking  direct 
questions  in  a  direct  way  and  putting  them  down  in  a  cold, 
Unfeeling  manner,  with  an  **I-know-youVe-dishonest- 
anyway'^  attitude — working  the  .customer  up  to  such  a 
murderous  frame  of  mind  that  the  least  he  can  do  is  to 
refuse  to  buy  if  he  does  get  credit.  But  the  man  who 
can  talk  to  a  customer  pleasantly  and,  interestedly  about 
his  affairs  and  circumstances,  getting  a  fact  here  and  an 
admission  there,  until  he  has  all  the  information  he 
wants,  without  a  direct  question,  will  secure  more  com- 
plete and  reliable  facts  than  those  obtained  by  a  brutal, 
straightforward  examination,  and  will  add  a  friend  and 
perhaps  a  customer  to  the  house.  Even  if  credit  cannot 
be  extended,  the  customer  should  be  so  handled  that  he 
will  leave  the  office  in  a  pleasant  frame  of  mind.  This 
is  all  a  mere  question  of  attitude  and  tact.  It  is  due, 
not  to  increasing  competition  between  houses,  but  to  the 
development  of  greater  kindliness,  smoothness  and  tact 
in  the  outward  show,  at  least,  of  business  relations. 

This  more  human  attitude  on  the  part  of  the  credit 
man  is  of  even  greater  importance  when  it  is  a  question 
of  handling  a  customer  who  is  in  the  debt  of  the  house 
and  has  got  into  difficulties.  Many  an  account  can  be 
saved  by  tactful,  though  always  firm,  treatment;  more 


CREDIT    MANAGEMENT 


11 


AGENCIES 

BANKS 

LAWVKRS 

i 

SOURCES    « 

SALESMEN 
NEWSPAPER  CLIPPINOS 

, 

• 

PERSONAL  STATEMENTS 

1 

QATMERINO 
INFORMATrbN 

.  CLASStrVINO  AND  RCCOROIHO 

1      OCTAILSO 
riUNO          < 

WORK  OP  THE 

>k                                1     SUMMABV 

CREDIT         < 

DEPARTMENT 

PIXINO  LIMIT  AND  TCIlMS' 

PA8SIN0  OrotRS  < 

APPROVINO 

RBPOBTS  rROM  ACCOUNTIHO  OKPARTMCNT 

MAKINa 

rOLLOWING'UP 

COLLECTIONS 

HANDLING    DELINQUENTS 

CREDITING  PAVMEIVTS 

CHART  I:    Outline  of  the  work  of  the  credit  department.     All  functions 

are  classified  under  three  general  heads  and  subdivided  according  to  the 

details  performed 


12 DEPARTMENT    ORGANIZATION 

than  this,  many  a  business  man  or  house  can  be  saved  to 
its  creditor  and  to  itself  by  a  policy  of  advice  and  co- 
operation— ^real  and  substantial — instead  of  a  policy  of 
suspicion  and  attack. 

NET  Tprofit  is  the  final  test  of  the  credit  marCs  worth 
to  his  house — the  value  of  orders  rejected  demands 
attention  as  well  as  losses  from  had  debts. 

The  attitude  which  a  credit  man  should  assume  is 
really  a  result  of  the  object  which  he  sets  before  him. 
His  purpose  is  to  sell  all  the  goods  he  can,  at  the  least 
possible  loss,  with  the  least  possible  expense,  and  with 
the  least  percentage  of  orders  declined.  It  is  easy  for 
the  credit  man  to  show  at  the  end  of  the  year  a  loss  of 
only  one-tenth  of  one  per  cent — if  he  makes  his  credits 
that  way.  When  the  head  of  a  concern  receives  his  credit 
man's  report,  he  should  also  ask  for  a  statement  of  the 
number  and  value  of  orders  declined.  It  is  a  very  easy 
task  to  turn  down  orders;  it  is  simple  to  keep  the  per- 
centage of  loss  down  if  no  chances  are  taken.  The  ques- 
tion for  consideration  is  not  only  how  little  money  did 
the  credit  man  lose  through  bad  debts,  but  also  how 
much  did  he  lose  in  orders  rejected ;  how  many  prospect- 
ive customers  did  he  kill  for  all  future  sales ;  how  many 
present  customers  did  he  offend  or  lose ;  how  much  ex- 
pense put  into  securing  orders  did  he  nullify  ? 

Of  course,  if  a  credit  man's  judgment  tells  him  that 
it  is  unsafe  to  extend  credit,  he  should  refuse  to  grant 
it.  But  it  is  a  far  cry  from  refusing  credit  to  losing  an 
order  or  a  customer.  If  it  is  not  advisable  to  grant 
credit,  the  credit  man  should  try  to  fill  the  order  on 
some  other  basis.  He  may  be  able  to  ship  the  goods 
under  some  guarantee  of  payment ;  perhaps  he  can  get 
the  buyer  to  pay  cash  in  part  at  least;  by  working  in 


CREDIT    MANAGEMENT 13 

conjunction  with  the  salesman  through  whom  the  order 
has  come,  some  satisfactory  arrangement  can  often  be 
made.  If  the  credit  man  explains  to  the  customer  fully 
and  in  a  tactful  manner  why  he  must  refuse  credit,  ex- 
presses a  desire  to  keep  .the  account,  and  asks  him 
whether  he  cannot  suggest  some  other  basis  on  which  the 
goods  can  be  shipped  him,  he  may  even  receive  the  co- 
operation of  the  customer  in  making  mutually  satisfac- 
tory arrangements.  Thus,  keeping  in  touch  with  the 
customer,  the  credit  man,  by  advising  and  helping  in  his 
growth,  may  gradually  bring  his  account  to  a  point 
where  it  can  be  put  on  a  credit  basis. 

Even  though  a  credit  man  does  not  see  his  way  clear 
to  opening  a  credit  account  with  an  applicant,  the  full 
reasons  can  be  put  to  him  in  such  a  light,  his  own  con- 
ditions can  be  so  analyzed  to  him,  the  attitude  of  the 
house  can  be  so  laid  before  him,  that  he  will  go  away 
knowing  the  credit  man  is  right — and  he  will  come  back 
again.  Instead  of  saying,  when  credit  is  refused  him, 
**I'll  be  hanged  before  I  ever  trade  with  that  house," 
he  will  say  to  himself,  "I'll  show  that  house  that  I  am 
worthy  of  credit  from  them."  To  make  such  an  im- 
pression requires  tact  in  handling  men,  and  the  greatest 
compliment  which  can  be  paid  a  credit  man  is  to  have  a 
man  to  whom  credit  has  been  denied  come  back  later. 

The  exact  balance  to  be  kept  between  sales  and  safety 
is,  in  a  lai^e  degree,  a  matter  of  house  policy.  It  de- 
pends on  the  kind  of  business  in  which  the  firm  is  en- 
gaged, the  class  of  its  customers  and  the  margin  of  its 
profits.  Some  houses  cannot  afford  to  run  a  risk ;  others 
figure  it  will  pay  them  to  take  chances,  not  in  an  irre- 
sponsible manner,  but  with  eyes  open,  and  after  careful 
consideration.  It  is  comparatively  easy  to  judge  whether 
a  man  is  really  entitled  to  credit;  to  decide  when  to 


14  DEPARTMENT    ORGANIZATION 

— f ■ 


take  a  chance  requires  experience  and  careful  consider- 
ation. 

Losses  come  in  taking  chances — so  does  volume  of 
sales.  That  credit  man  excels  who,  taking  what  looks 
like  a  long  chance,  by  such  mental  means  and  systematic 
methods  as  he  possesses  shortens  the  chance  and  brings 
it  to  the  point  of  safety. 

WHAT  guides  the  credit  man  in  sizing  up  the  de- 
sirabUity  of  a  credit  risk— factors  that  underlie  his 
determination  to  grant  or  refuse  accommodation. 

The  basis  for  credit,  the  information  in  accordance 
with  which  the  credit  man  forms  his  judgment,  differs 
according  to  different  factors.  The  location  of  a  business 
house,  the  kind  of  goods  it  carries,  the  general  character 
of  its  trade,  the  particular  form  of  credit  it  ordinarily 
extends — all  these  modify  the  kind  of  information 
wanted,  so  that  it  would  be  futile  to  attempt  to  set  down 
even  in  general  the  facts  used  in  making  credit  judg- 
ments. Credit  men  themselves  vary  as  to  the  particular 
facts  they  desire  and  find  useful.  Each  puts  emphasis 
on  different  points  and  facts  as  his  experience  dictates ; 
one  lays  stress  on  character,  another  on  ability,  a  third 
on  past  experience;  this  one  considers  especially  the 
amount  of  capital,  that  one  the  volume  of  sales. 

No  better  statement  of  the  essential  information 
needed  to  judge  of  the  advisability  of  extending  credit 
could  be  made  than  this,  quoted  from  Mr.  Horace  C. 
Bennett:  **The  bases  for  commercial  credit  are  ability, 
integrity  (absolutely  essential),  and  property  (not 
necessarily  essential),  and  the  truth  regarding  these  is 
what  the  trade  wants. 

**  Ability  is  measured  by  age,  health,  business  experi- 
ence, education,  income  by  personal  effort.    The  evidence 


CREDIT    MANAGEMENT 15"^ 

of  integrity  is  business  and  social  honor,  personal  de- 
portment, character  of  associates  and  reputation.  We 
mean  by  property  that  which  can  be  taken  under  an  ex- 
ecution and,  whether  personally  acquired  or  inherited, 
qualified  by  income  and  net  wealth. '  ^  -i 

While  tangible  a^ets  are  the  chief  basis  for  the  ex- 
tension of  credits,  yet  it  can  be  stated  absolutely — and 
it  is  an  agreeable  evidence  of  the  large  part  which  the 
human  element,  man  himself,  plays  in  the  more  or  less 
sordid  operations  of  business — that  the  rock  bottom 
foundation  upon  which  the  whole  system  of  credit  is 
based  is  character.  Those  characteristics  of  the  man  him- 
self most  significant  to  the  credit  man  are  rightfully 
identical  with  the  most  essential  elements  for  success  in 
any  man:  honesty,  good  habits,  ability,  industry,  econ- 
omy and  care  in  the  conduct  of  business.  Of  these  right- 
ful assets  none  can  be  levied  upon  by  law,  but  just  as  a 
man  cannot  attain  success  without  them,  so  a  credit  man 
cannot  give  credit  to  a  merchant  lacking  them.  In  fact, 
if  a  credit  man  could  be  absolutely  sure  of  an  applicant's 
honesty,  all  other  considerations  might  safely  be  elimi- 
nated. Not  that  honest  men  never  fail,  for  they  often 
lack  ability  and  other  essentials,  but  between  the  man  ^ 
with  large  resources  and  doubtful  honesty,  and  the  honest 
but  financially  weak  man,  the  latter  is  entitled  to  credit, 
and  to  the  former  confidence  should  be  denied.  -  * 

A  very  significant  fact,  very  often  if  not  generally 
overlooked  by  a  credit  man  in  judging  of  a  customer's 
title  to  confidence,  is  the  volume  of  his  sales,  the  amount 
of  his  expenses,  and  the  relation  between  the  two.  It  is 
not  the  amount  of  capital  which  a  man  has  in  his  business, 
so  much  as  the  frequency  with  which  he  turns  his  capital 
over,  that  affords  an  insight  into  his  real  ability  and  the 
actual  condition  of  his  business,  that  shows  up  the  true 


16 DEPARTMENT    ORCx ANIZATION 

color  of  his  affairs  and  indicates  the  healthiness  of  his 
trade.  The  amount  of  his  expenses  is  a  true  index  of  his 
business  management.  These  two  figures  give  the  closest 
line  on  a  merchant's  situation.  No  financial  report  is, 
therefore,  complete  without  a  statement  of  sales  and  ex- 
penses. 

SOURCES  of  information  open  to  the  credit  man  for 
determining    accurately    the  character,  record   and 
business  responsibility   of  prospective  buyers. 

A  credit  man  should  get  all  information  possible  re- 
garding a  customer.  The  first  source  of  information,  as 
being  the  easiest  and  quickest  of  access,  is  the  rate  books 
of  the  large  commercial  agencies,  where  the  capital  and 
credit  rating  of  most  merchants  can  be  found.  The 
next  most  common  source  of  information  is  special  re- 
ports from  these  agencies,  which  give  detailed  state- 
ments of  the  character,  resources  and  situation  of  a 
business  man.  These  reports  are  of  value,  for  they  give 
certain  definite  data  and  specific  facts,  and  sometimes  in- 
clude a  sworn  and  signed  statement  from  the  man  in- 
vestigated. But  they  are  rarely  fresh,  they  are  revised 
'gonfessedly  only  twice  a  year,  and  then  undergo  a 
process  of  rehashing  rather  than  revising. 

Local  attorneys  and  banks  can  be  put  to  very  good 
use  as  commercial  reporters,  and  are  a  valuable  instru- 
ment to  the  credit  man  if  used  properly.  But  the  prac- 
tice of  obtaining  information  from  them  gratuitously  is 
a  mistake.  The  laborer  is  worthy  of  his  hire.  Better 
returns  are  bound  to  come  if  the  labor  is  paid,  for  even 
though  local  attorneys  are  in  the  habit  of  rendering  such 
service  gratis  in  the  hope  and  expectation  of  receiving 
collection  work  from  the  houses  they  serve,  they  wiU 
naturally  put  more  care  and  work  upon  a  report  for 


CREDIT    MANAGEMENT 17 

which  they  are  receiving  direct  and  adequate  payment. 

Attorneys  can  give  the  latest  information  and  the  most 
intimate  facts,  for  they  are  familiar  with  local  conditions, 
they  are  on  the  spot  and  get  their  information  first  hand, 
and  they  are  often  in  personal  touch  with  the  subject  of 
the  inquiry. 

The  value  of  the  information  to  be  obtained  from 
banks  depends  much  on  the  way  they  are  approached. 
A  clever  correspondent,  who  presents  his  case  as  a  busi- 
ness proposition  and  is  candid  in  regard  to  what  he 
wants,  at  the  same  time  offering  compensation,  can 
secure  very  good  service.  Bankers  are  the  highest  grade 
merchants  in  the  country ;  high  grade  reports  can  justly 
be  expected  from  them ;  and  usually,  when  they  do  give 
information,  it  can  be  relied  upon. 

The  * '  credit  clearing  house ' '  is  one  of  the  best  instru- 
ments in  the  determination  of  credits  in  those  lines  of 
business  represented  by  it.  It  does  not  duplicate  the 
agency  and  other  reports,  but  is  supplementary  to  them. 
It  reports  only  figures  and  facts,  and  really  gives  to  a 
membership  house  access  to  the  ledger  account  of  the 
customer  under  investigation  with  every  member  having 
his  trade. 

ESTABLISHING  cordial  relations  with  the  selling 
I  force  insures  valuable  cooperation  in  securing  first- 
hand credit  information  on  prospective  buyers. 

Salesmen  afford  a  valuable  source  of  information,  if 
the  credit  man  will  take  the  trouble  to  educate  them  to 
the  observation  and  collection  of  the  kind  of  information 
he  desires.  The  good  salesman  will  not  necessarily  be  a 
good  credit  man,  especiallj^  in  the  same  transaction.  The 
two  activities  are  along  different  lines,  and,  especially 
when  applied  to  the  same  transaction,  pull  in  opposite 


18 DEPARTMENT    ORGANIZATION 

directions.  But  salesmen  can  be  made  valuable  adjuncts 
to  the  credit  department  if  the  credit  man  has  the  tact 
to  arouse  a  cooperative  interest  among  them.  To  do 
this  he  must  convince  them  that  he  is  trying  as  hard 
as  they  to  ship  goods.  He  must  show  that  he  is  willing 
to  be  educated  along  their  lines,  that  he  will  do  his  part. 
Then  they  will  reciprocate. 

Once  credit  has  been  granted  and  a  new  account 
opened,  the  work  of  the  credit  man  has  only  begun.  He 
must  not  only  watch  each  account,  keep  track  of  the 
amount  due  and  over-due,  the  promptness  in  paying,  the 
size  of  the  orders — ^all  of  which  he  can  learn  from  con* 
stant  study  of  his  ledger  pages — but  he  must  also  watch 
each  customer  and  his  general  condition,  which  is  sub- 
ject to  constant  and  often  rapid  change.  This  he  must 
learn  from  special  reports,  from  salesmen,  and  from  per- 
sonal interviews. 

This  part  of  a  credit  man^s  work  is  responsible  foi 
the  fact  that  he  is  generally  the  head  office  man,  ir 
charge  of  the  bookkeeping  department  and  the  collections 
Prom  the  bookkeeping  and  collection  records  only  car 
the  credit  man  know  how  much  each  customer  owes 
how  much  he  buys,  and  how  much  he  pays.  It  is  neces 
sary,  therefore,  not  only  that  he  have  constant  access  tc 
the  books  and  records,  but  also  that  he  have  control  oJ 
the  methods  in  which  they  are  kept,  in  order  that  thej 
may  fit  into  his  general  system. 

He  must  also  keep  in  touch  with  the  sales  depart 
ment  of  the  home  office,  for  he  should  know  what  profi 
the  various  kinds  of  goods  bear.  A  house  can  afford  t( 
ta^e  a  longer  chance  on  an  order  carrying  a  large  profi 
than  on  one  in  which  the  margin  of  profit  is  very  small 
a  default  in  the  payment  of  which  would  mean  almost  i 
total  dead  loss. 


CREDIT    MANAGEMENT 19 

The  fact  that  the  credit  man  must  know  about  pay- 
ments of  bills  in  order  to  pass  on  orders,  and  that  he 
alone  has  the  intricate  knowledge  of  customers  which 
will  indicate  how  to  handle  accounts  for  collection, 
naturally  places  the  collection  department  under  his  con- 
trol. 

COLLECTIONS  require  constant  vigilance;  only  by 
promptness  and  persistence  can  a  credit  man  accom- 
plish his  object — to  educate  customers  to  pay  promptly. 

A  credit  man,  to  be  successful,  must  be  a  good  col- 
lection manager,  a  good  collector.  He  must  know  that 
prompt  collection  of  accounts  is  more  than  half  the  game 
in  keeping  percentage  of  losses  down,  and  he  must  know 
how  to  educate  his  customers  into  prompt  payers  of  their 
own  volition.  Customers  who  are  perfectly  good  are 
often  as  slow  in  remitting  as.  the  more  doubtful.  The 
collection  department  should  be  strict  with  all  alike ;  it 
should  be  after  a  debtor  the  minute  a  bill  is  due,  no 
matter  how  good  he  is,  and  stick  to  him  until  the  in- 
debtedness is  paid.  A  house  which  is  a  prompt  collector 
and  shows  its  customers  thereby  that  their  accounts  are 
watched  will  command  more  respect  than  the  careless 
house,  and  will  invariably  be  paid  first. 

This  does  not  mean  that  annoying  or  offensive  meth- 
ods need  be  resorted  to  the  moment  a  bill  is  overdue.  A 
statement  before  the  account  is  due,  marked  with  some 
excusatory  phrase,  as  *'For  Correction,"  may  be  fol- 
lowed by  a  second  statement  as  a  reminder.  After  a 
reasonable  length  of  time  a  sight  draft  may  be  made  on 
the  debtor.  This,  however,  is  no  such  infallible  method 
now  as  it  once  was,  when  dishonor  of  a  sight  draft  was  a 
confession  of  insolvency.  A  sight  draft  has  lost  all  its 
terror,  and  a  merchant  thinks  no  more  of  refusing  to 


20 DEPARTMENT    ORGANIZATION 

meet  it  than  he  does  of  putting  off  the  payment  of  an 
ordinary  bill.  The  change  has  come  about  gradually  and 
is  the  fault  of  the  creditor  class;  in  this,  as  in  many 
other  phases  of  collections,  they  have  been  and  still  are 
too  lenient. 

If  a  draft  is  returned  dishonored,  no  one  course  of  pro- 
cedure can  be  laid  down  as  the  correct  one  to  use  in  all 
cases,  nor  would  aU  agree  on  the  handling  of  a  single 
given  case.  Credit  clearing  drafts  are  very  effective,  be- 
cause if  such  a  draft  is  dishonored  the  merchant  knows 
that  this  fact  is  going  to  be  communicated  to  all  the 
members  of  the  credit  clearing  association,  upon  whom 
he  must  depend  for  his  supplies,  and  he  is  only  too  well 
aware  of  how  seriou^y  this  will  impair  his  credit.  A 
collection  agency  draft  is  similarly  efficacious.  It  is 
often  well,  in  working  on  stubborn  collections,  to  call  the 
debtor's  attention  to  the  fact  that  he  is  hurting  his 
credit,  for  there  he  is  touched  in  a  vital  and  sensitive 
spot. 

Great  conservatism  is  necessary  in  granting  extensions. 
The  efficient  credit  man  will  demand  good  and  sub- 
stantial reasons  to  account  for  delay  in  payments  before 
extensions  are  granted,  and  will  require  a  thorough 
knowledge  of  the  debtor's  condition.  If  more  time  is 
given,  the  creditor  should  seek  to  keep  in  close  touch  with 
the  debtor  and  his  affairs. 

CUSTOMERS  should  understand  the  credit  depart- 
ment's willingness  to  help  them;  hut  cooperation  is 
possible  only  on  the  condition  of  entire  frankness. 

Sharpness  and  quick  action  are  necessary  when  a 
debtor  fails  to  pay  his  account  and  to  give  any  satis- 
factory reason  for  his  delay  in  paying,  after  repeated 
letters  have  admonished  him.    If  the  debtor  understood 


CREDIT    MANAGEMENT 21 

the  real  relation  of  the  credit  man  to  him,  under  these 
circumstances  he  would  give  a  frank  account  of  his  con- 
dition, for  the  credit  man  is  generally  as  worried  over 
the  account  as  the  debtor  himself,  and  as  anxious  to  settle 
it.  A  credit  man  will  seldom  ' '  turn  down ' '  a  man  who 
tells  the  ti-uth,  and  will  always  do  his  best  to  arrange  a 
satisfactory  settlement.  If  such  a  customer  appreciated 
the  liberal  feeling  of  the  credit  department  toward  him, 
if  he  would  simply  write  to  the  credit  man  when  he  is 
unable  to  pay  his  account,  and  would  make  some  definite 
arrangement  for  future  payment,  he  would  be  surprised 
to  find  how  easy  it  would  be  made  for  him.  The  credit 
man  always  wants  to  help  the  honest  debtor  if  he  can ;  if 
the  debtor  will  not  let  him,  he  is  helpless.  If  he  makes 
an  offer  and  the  debtor  pays  no  attention  to  it,  the 
credit  man  is  at  the  end  of  his  string.  A  customer  ought 
never  to  feel  that,  because  his  bills  are  past  due  and  he  is 
unable  to  pay  them,  he  will  fail  to  meet  consideration  at 
the  hands  of  the  credit  man.  The  worse  the  condition  he 
is  in,  the  more  desirous  the  credit  man  is  to  help  him,  for 
he  cannot  get  his  own  money  without  helping  the  debtor. 
This  may  be  a  selfish  motive,  but  for  that  very  reason  it 
is  a  powerful  one. 

In  all  his  efforts  at  collection  the  credit  man  should 
never  give  offense ;  let  him  throw  the  tuft  of  grass  first, 
just  to  call  the  debtor's  attention  to  Avhat  may  come. 
If  this  does  not  work,  the  credit  man  may  give  him  the 
rock — but  only  as  a  last  resort,  for  stringent  methods, 
the  collection  of  an  account  by  legal  means,  will  surely 
mean  the  loss  of  the  customer  in  question.  This  is  in- 
evitable for  three  reasons:  The  credit  man  will  always 
suspect,  and  justly,  such  a  customer,  for  nowadays  a 
man  must  treat  his  account  pretty  badly  to  have  it  put 
into  an  attorney's  hands,  and  so  he  will  hesitate  to  ex- 


22 DEPARTMENT    ORGANIZATION 

tend  him  credit  again.  Second,  this  will  be  a  good  ac- 
count to  drop  anyway,  for  a  man  who  has  been  sued  by 
a  creditor  usually  treasures  it  up  against  him  and  will 
take  a  joy  in  making  trouble  for  him,  if  ever  opportunity 
offers.  Third,  the  customer  will  very  rarely  come  back  to 
trade  with  a  house  which  has  sued  him. 

Never  to  compromise  an  account  seems  to  me  a  poor 
policy  for  any  house  to  adopt.  The  usual,  fairest  and 
most  satisfactory  method  in  the  case  of  an  insolvent 
debtor  is  for  the  smaller  creditors  to  accept  any  percent- 
age or  other  settlement  thought  fair  and  just  by  the 
larger  creditors.  The  latter,  having  most  at  stake,  will 
always  investigate  thoroughly  and  can  be  depended  upon 
to  make  the  best  possible  terms.  It  is  fairest  for  all 
houses  to  be  thus  guided  by  the  desires  of  the  larger 
creditors,  for  it  is  a  reciprocal  arrangement. 


^ 


THE  organization  and  management  of  a  credit  department 
is  not  unlike  the  building  and  superintending  of  a  manu- 
facturing plant;  each  requires  architect,  workmen,  plans, 
material,  and  tools,  all  selected  vnth  an  intelligent  conception 
of  the  ultimate  purpose. 

It  is  the  little  details  that  make  or  mar  the  effectiveness  of 
any  structure  or  organization  just  as  it  is  the  little  things  of 
everyday  life  that  make  success  or  failure;  rior  does  the  like- 
ness  end  there,  for  as  life  requires  a  sterling  character,  so 
the  structure  must  have  a  firm  foundation,  the  organization 
a  master  mind. 

— Dorchester  Mapes 


II 


THE  MAN  FOR  THE 

CREDIT  DESK 

/ 

By  F.  F.  Peabody 
President,  Cluett,  Peabody  &  Company 

AS  used  in  mosi  houses  the  title  of  credit  man  in- 
cludes far  wider  duties  than  the  term  itself  de- 
fines. The  credit  man  is  usually  the  responsible  head  of 
the  entire  office  work,  with  general  oversight  over  the 
whole  bookkeeping  and  record  department,  and  is  in 
immediate  control  of  the  collections,  as  well  as  of  the 
credit  department  itself.  He  is  often  cashier,  too,  the 
man  who  is  in  charge  of  the  moneys  of  his  house  and 
who  watches  the  baak  balance,  the  bills  payable  and  the 
accounts  receivable. 

This  multiplicity  of  duties  is  due  to  two  causes.  The 
credit  man  is  pre-eminently  the  student  of  the  busi- 
ness concern.  In  his  particular  work  it  is  his  duty  to 
reach  certain  conclusions  from  careful  investigation  of 
the  characters  and  conditions  of  men,  through  personal 
touch  with  them,  and  through  study  of  documentary 
reports  and  historical  accounts.  He  is  the  one  important 
factor  in  the  management  of  a  business  whose  work  is 
all  on  the  inside.  Therefore,  the  general  management 
of  all  the  inside  work,  the  office  work,  is  assigned  to 
him,  as  being  the  one  who  can  most  conveniently  oversee 
it,  and  who  is  the  nearest  to  it,  both  territorially  and 
functionally. 

More  important  than  this  is  the  second  cause,  which 


24 DEPARTMENT    ORGANIZATION 

is  based  upon  the  fact  that  the  credit  man  is  in  closest 
touch  at  all  times  with  the  bookkeeping  department. 
Moreover,  he  has  as  a  rule  come  up  through  this  depart- 
ment, and  he  must  control  its  methods  in  order  to  carry- 
out  the  policies  and  system  of  the  credit  department. 
The  test  of  a  credit  man's  success  as  measured  by 

^  his  employer  are  four:  the  average  annual  losses,  the 
accounts  receivable  measured  by  the  average  number 
of  days'  sales  contained  in  them,  the  average  percent- 
age of  discounts,  based  upon  receipts,  and  the  general 
office  expenses,  if  he  has  the  management  of  the  office 
in  charge.  The  first  is  a  test  of  his  ability  purely  as  a 
credit  man;  the  second  and  third  his  worth  as  a  col- 

i.  lector ;  the  fourth  his  capacity  in  executive  work. 

GENERAL  and  specific  knowledge  required  for  carry- 
ing  on  the  work  of  the  credit  department — the  three 
essential   characteristics  of  a  credit  man. 

p  For  his  purely  credit  functions,  the  credit  man  needs 
three  distinct  characteristics.  The  first  is  a  wide  and 
general  knowledge  of  business  methods  and  business  con- 
ditions. When  deciding  whether  to  open  a  new  credit 
account,  the  credit  man  must  know  the  general  business 
conditions  of  the  territory  in  which  the  applicant  is 
located,  in  order  that  he  may  judge  whether  the  latter 's 
sales  and  collections  will  enable  him  to  pay  his  account 
when  it  is  due.  For  instance,  if  a  crop  failure  seems 
imminent  in  North  Dakota,  he  must  draw  in  his  credits 
in  that  region  and  must  handle  his  account  accordingly ; 
on  the  other  hand,  if  a  well-founded  and  legitimate  boom 
appears  to  be  starting  in  Oklahoma,  he  should  attempt 
to  extend  his  firm's  business  there,  and  should  be  rather 
free,  perhaps,  in  granting  credit.  He  must  know  the 
general  financial  condition  of  the  country,  in  order  to 


THE    CREDIT    MANAGER 25  ' 

judge  whether  the  prospects  on  which  the  debtor  depends 
for  paying  his  account  will  materialize,  and  whether  his 
own  firm  can  stand  a  further  extension  of  its  credit  ac- 
counts in  view  of  a  coming  financial  or  industrial  de- 
pression. 

Every  business  man  must,  of  course,  have  a  general  '^, 
knowledge  of  business  methods.  But  the  credit  man 
must  be  familiar  with  the  details  of  all  the  lines  of 
business  in  which  his  debtors  are  engaged,  in  order  to 
determine  whether  the  capital,  sales,  expenses,  and  past 
experience  of  an  applicant  for  credit  give  promise  of  his 
ultimate  success.  He  must  Imow  also  the  elements  of 
commercial  law,  the  statutes  of  exemptions,  the  financial 
responsibility  of  corporation  officers  and  of  the  members 
of  a  partnership,  the  legal  age  of  open  accounts,  and 
similar  generalities.  He  cannot  have  a  detailed  knowl- 
edge of  these  facts,  but  if  they  are  a  part  of  his  general 
information,  his  credit  making  will  be  influenced  and  ^- 
strengthened  thereby. 

The  second  necessary  characteristic  of  the  credit  man  -^ 
is  a  keen  insight  and  an  analytical  mind.  The  work  of 
a  credit  man  requires  a  succession  of  decisions,  each  one 
of  importance,  but  necessarily  made  hastily.  These 
judgments  are  not  arbitrary,  but  are  based  on  a  study 
of  certain  groups  of  facts,  usually  of  four  kinds:  first, 
the  general  knowledge  of  the  credit  man  himself ;  second, 
impressions  gained  by  him  from  personal  touch  and  ac- 
quaintance with  the  customer;  third,  specific  facts  con- 
cerning the  character,  ability  and  resources  of  the  ap- 
plicant, gained  in  various  ways,  and  fourth,  if  he  is  an  > 
old  customer,  his  record  with  the  house  itself. 

It  takes  keen  insight  to  fix  at  once  upon  the  vital 
and  decisive  factors  in  this  great  mass  of  material,  and 
sharp  analytical  power  to  sift  the  kernels  from  the  chaff 


^  26 DEPARTMENT    ORGANIZATION 

and  to  correlate  the  important  facts.  The  superj&cial 
credit  man  is  liable  merely  to  look  at  a  debtor's  quick 
assets,  at  his  total  outstanding  debts,  without  going 
deeper,  and  especially  without  considering  his  character 
and  qualifications  for  success  and  his  surroundings.  The 
honesty,  good  habits  and  industry  of  a  debtor,  the  com- 
mercial condition  of  the  locality  in  which  he  trades,  and 
the  esteem  in  which  he  is  held  there,  are  just  as  much  a 
part  of  his  capital  as  the  cash  he  has  invested  in  the 
business  or  the  amount  of  his  unencumbered  property, 
and  are  even  a  bigger  element  in  his  chances  for  success. 
These  items  are  harder  to  discover  and  determine  than 
capital  and  debts,  but  the  good  credit  man  will  lay  much 
stress  upon  them.  In  a  long  report,  on  a  merchant  per- 
haps a  thousand  miles  away,  it  needs  the  most  astute 
reading  between  the  lines  and  the  cleverest  putting  to- 
gether of  two  and  two  to  arrive  at  the  true  condition  of 
this  man's  affairs.    The  problem  is  up  to  the  credit  man. 

SYMPATHY  and  tact  guide  the  efficient  credit  man;  only 
by  means  of  these  qualities  can  he  get  the  information 
from  customers  he  requires  and  preserve  their  good  vnll, 

Y  The  credit  man's  third  requirement  is  tact,  and  tact 
in  the  broadest  possible  sense.  Tact  means  sympathy 
with  other  people,  ability  to  put  one 's  self  in  their  place 
and  understand  their  condition.  It  implies  an  openness 
to  receive  aid  and  advice,  a  willingness  to  learn  new 
facts  and  change  old  methods.  It  carries  with  it  the  idea 
of  caution  and  carefulness.  No  tactful  man  is  impetu- 
ous; he  weighs  and  considers  all  pertinent  facts  before 
he  comes  to  a  decision.  Yet  the  very  word  tact  im- 
plies ability  to  decide  quickly,  an  intuition,  almost,  of 
the  right  course  to  take.  The  man  of  tact  must  have  a 
good  memory,  otherwise  he  will  make  errors  and  blun- 


THE    CREDIT    MANAGER 27 

ders;  he  must  remember  people's  weaknesses  and  their 
sensitive  spots,  in  order  to  avoid  them ;  he  must  remem- 
ber their  interests  and  hobbies,  in  order  to  fraternize 
with  them;  he  must  remember  their  strength  and  their 
pride,  in  order  to  appeal  to  their  vanity. 

A  tactful,  sympathetic  credit  man  will  learn  all  he 
wishes  from  the  customer  who  is  being  interviewed  so 
adroitly  that  he  will  go  away  without  any  loss  of  self- 
respect  or  any  feeling  of  resentment,  yet  leaving  to  the 
credit  man  the  information  he  desires.  The  credit  man 
has  often  to  ask  and  do  many  things  which  are  unpleas- 
ant and  embarrassing  both.to  himself  and  to  the  debtor. 
If  he  can  do  these  things  in  such  a  way  as  to  keep  the 
customer's  good  will  and  even  make  himself  the  latter 's 
confidant  and  adviser,  so  that  the  customer  will  volun- 
tarily keep  him  informed  of  his  condition — that  is  tact. 

The  ability  to  handle  men  is  in  part  inborn.  Some 
men  are  able  to  influence,  to  impress  themselves  upon 
their  fellow  men  without  effort,  while  others  appear 
always  isolated,  at  angles  with  those  around  them.  But  a 
very  good  imitation  of  this  ability  can  be  acquired,  and 
nothing  should  be  so  impressed  upon  a  credit  man  as  the 
necessity  of  developing  an  attractive  personality,  of 
forcing  people  to  like  him.  This  ability,  however,  must 
be  based  upon  real  sincerity,  and  real  sympathy.  Mere 
surface  smoothness,  mere  exuberant  good  fellowship,  will 
not  accomplish  the  object.  There  must  be  an  under- 
standing and  a  continuous  study  of  human  nature,  a 
charity  for  human  weakness,  a  fellow  feeling  of  human 
interests.  Above  all  the  credit  man  should  never  take 
the  attitude  that  mankind  in  general  is  dishonest.  This 
standpoint  will  more  quickly  kill  his  efforts  and  ruin  his 
prospects  than  even  the  opposite  extreme.  It  will  hurt 
him  with  his  trade ;  it  will  hurt  him  with  his  house ;  it 


\ 


28 DEPARTMENT    ORGANIZATION 


will  work  against  his  success  at  every  turn. 

In  his  relations  with  the  other  departments  of  his 
house  the  credit  man  can  make  or  mar  hia  record.  It  is 
especially  essential  that  he  be  willing  and  eager  to  re- 
ceive information  and  advice  from  those  who  have  an 
opportunity  to  learn  and  see  things  pertaining  to  his 
work  from  a  different  viewpoint.  His  relations  with  the 
salesmen  of  the  house  are  particularly  important  and 
delicate.  The  amount  of  harm  which  a  credit  man  with 
too  exaggerated  an  idea  of  the  importance  of  his  office 
and  its  immense  height  over  the  realm  of  the  salesman 
can  do  is  incalculable. 

Caution  and  carefulness  in  the  performance  of  his 
duties  have  been  dinned  into  the  ears  of  the  credit  man 
so  much  that  there  has  been  danger  of  his  going  to  the 
opposite  extreme.  But  when  it  is  considered  that  more 
losses  result  from  carelessness  than  from  any  other  one 
cause,  the  emphasis  can  hardly  be  made  too  strong. 

V  Iji  SPECIALLY  when  a  series  of  prompt  payments 

J— i  have  put  the  credit  man  off  his  guard,  carelessness 
creeps  in — the  price  of  safety  is  constant  waichfulness. 


U 


The  place  and  time  for  caution  are  especially  worthy 
of  attention.  In  granting  credit  to  a  new  customer,  spe- 
cial care  is  observed.  The  new  name  is  probably  wholly 
unknown  to  the  credit  man.  He  inevitably  feels  the  need 
of  full  information,  and  as  such  information  is  com- 
paratively easy  to  secure,  he  obtains  it  at  once.  He 
looks  up  the  customer  in  the  rating  books ;  he  obtains  the 
mercantile  reports  on  him  and  private  statements  from 
him.  If  he  concludes  that  it  is  not  safe  to  extend  the 
credit  asked  he  does  not  have  that  feeling  of  breaking  a 
business  connection  and  losing  a  customer  which  he  has 
when  he  refuses  credit  to  an  old  customer.     There  is 


THE    CREDIT    MANAGER  29 

only  one  consideration  especially  liable  to  undermine  a 
credit  man's  caution  in  making  initial  credits — the  fear 
that  if  he  refuses  an  account,  a  competitor  will  accept 
and  profit  by  it.  This  phase  of  the  matter  should  never 
be  allowed  to  weigh  with  the  credit  man,  for  no  course 
of  reasoning  could  be  more  fallacious.  Not  only  is  he  a 
very  poor  credit  man  who  needs  this  consideration  in 
helping  him  form  his  judgment,  but  it  is  also  most 
illogical ;  if  he  believes  the  account  unsafe  in  itself,  and 
if  he  has  the  facts  to  back  his  opinion  which  he  ought 
to  have,  he  should  be  willing  .to  let  it  go  to  a  competitar 
— to  the  latter 's  undoing — for  he  will  thus  gain  more 
than  he  loses. 

It  is,  however,  especially  when  an  account  has  run  on 
for  a  long  time,  when  a  constant  succession  of  orders 
promptly  paid  has  lulled  the  alertness  of  the  credit  man, 
that  carelessness  gets  in  its  work.  The  credit  man,  over- 
whelmed with  work,  pressed  for  time,  will  allow  an  order 
to  slip  through  here  and  there  regarding  which  he  is  not 
absolutely  sure,  except  that  he  knows  the  customer  has 
been  with  the  house  a  long  time,  and  has  a  vague  idea 
that  he  is  good  and  pays  promptly.  It  is  on  such  ac- 
counts that  he  is  most  frequently  caught.  The  credit 
man  must  be  persistent  and  painstaking  in  his  methods. 
By  some  means  or  system  he  should  keep  in  touch  with 
the  trend  of  all  of  his  accounts,  both  those  of  his  good 
customers  and  those  of  the  doubtful  ones;  lapses  in  the 
one  should  he  caught  and  taken  up  as  in  the  other. 

In  testing  the  credit  man's  ability  and  success  by  the 
average  amount  of  his  accounts  receivable,  the  business 
man  is  really  testing  his  ability  as  a  collector.  In  the 
judgment  of  many,  a  clever  collector  is  more  important 
in  most  offices  than  a  brilliant  credit  man.  By  ability 
to  collect  is  not  meant  the  power  to  extract  money  from 


30  DEPARTMENT    ORGANIZATION 


a  refractory  and  unwilling  debtor,  but  rather  the  ability 
to  impress  and  train  the  debtor,  willing  or  stubborn,  in 
such  a  way  that  he  will  unconsciously  get  into  the  habit 
of  paying  promptly. 

The  prompt  collecting  of  accounts  has  a  triple  com- 
pensation. It  keeps  outstanding  Eiccounts  down,  and  thus 
requires  less  capital  to  run  the  business.  The  added 
value  of  a  credit  man  who,  by  keeping  his  accounts  re- 
ceivable low,  enables  his  employer  to  run  his  business 
with  less  working  capital  than  his  competitor,  frequently 
amounts  to  more  than  his  yearly  salary.  In  the  second 
place,  the  strict  collector  is  the  best  salesman.  It  is  an  ad- 
mitted fact  that  a  customer  who  has  a  past-due  account 
with  a  house  will  place  his  current  order  with  another 
house;  the  loss  is  apparent.  Finally,  credit  men  agree 
that  the  great  majority  of  losses  occur  among  Overdue 
accounts;  a  man  who  owes  nothing  cannot  fail,  and  a 
man  who  pays  every  thirty  days  is  most  unlikely  to  be- 
come insolvent,  and  the  merchant  who  is  held  strictly  to 
his  payments  will  not  be  likely  to  over-buy,  in  fact,  he 
cannot. 

In  discussing  the  characteristics  necessary  for  admin- 
istering the  affairs  of  the  general  office,  one  point  needs 
particular  emphasis.  The  credit  man  has  often  been  ac- 
cused, whether  justly  or  unjustly,  of  preferring  old  ways 
and  opposing  new  ideas  and  methods  because  of  the 
change  involved  and  the  trouble  and  expense  incurred  in 
adopting  them.  Many  of  the  older  school  of  credit  men 
are  moving  along  in  the  same  old  way,  not  realizing  that 
the  doubling  of  the  volume  of  their  firm's  business  more 
than  doubles  the  details  of  their  department.  This  type 
of  credit  man  refuses  to  install  a  modem  system  for  tak- 
ing these  details  off  his  shoulders,  for  dividing  his  work, 
fearing,  perhaps,  that  the  work  which  he  has  been  doing 


THE    CREDIT    MANAGER 31 

himself,  if  transferred  to  someone  else,  will  not  be  done 
well.  In  thus  giving  his  time  to  the  performance  of 
petty  details,  or  even  to  the  accomplishment  of  an  over- 
plus of  important  work,  he  comes  to  be  looked  upon  as 
the  busiest  man  in  the  house,  an  expression  which  is 
very  often  heard. 

For  a  man  in  the  position  of  credit  manager  to  be 
over-busy  must  surely  be  considered  a  mistake  and  an 
injury  to  the  best  interests  of  the  house.  A  credit  man 
who  performs  a  great  deal  of  detail  and  cumbersome 
work,  occupying  all  his  attention  and  absorbing  all  his 
efforts,  who  allows  a  mass  of  unfinished  work  to  ac- 
cumulate, thus  necessarily  slighting  all  his  work,  is  prac- 
ticing false  economy.  A  clerk  and  a  well-regulated  sys- 
tem, which  would  take  merely  the  routine,  not  the  re- 
sponsibility, off  his  shoulders,  could  save  him  much 
nervous  energy  and  irritation  and  leave  his  time  and 
mind  open  for  more  valuable  work. 

The  credit  man  must  be  modem  in  his  methods.  He 
must  see  that  his  credit  department  system  and  his  gen- 
eral office  system  handle  details  quickly  and  accurately, 
and  that  this  system  sifts  out  of  the  details  the  vital 
facts  which  he  should  know  and  presents  them  to  him 
quickly  and  in  concise,  comprehensive  form,  leaving  him 
time  for  thought  on  problems  which  will  always  be  pres- 
ent for  his  solution. 


'f\7'ITH0UT  organization  and  system,  business  would  still 

^^  be  done  on  the  small  scale  of  olden  days  and  the  business 

man  would  still  be  an  insignificant  trader  or  small  individual 

manufacturer  instead  of  the  great  captain  of  industry  of  today. 

— ^Walter  H.  Cottingham 

President,    Sherwin-Williams  Company 


Ill 

COMMERCIAL  AGENCY 
RATINGS  AND  METHODS 

By  T.  J.  Zimmerman 

THAT  point  at  which  the  commercial  agency  enters 
into  credit  operations  is  between  the  receipt  of  the 
order  and  the  shipment  of  the  goods.  Credit  rests  upon 
the  seller's  confidence  in  the  buyer's  ability  to  pay;  con- 
fidence results  from  favorable  knowledge  of  a  man's 
character,  ability  and  circumstances.  In  order  to  decide 
whether  his  house  wishes  to  extend  credit  to  an  appli- 
cant, to  determine  the  amount  of  credit  which  it  is  ad- 
visable to  extend,  and  to  decide  upon  the  specific  terms 
on  which  this  credit  is  to  be  granted,  the  credit  man 
must  have  certain  general  and  specific  information.  Such 
information  the  commercial  agency  has  made  it  its 
function  to  furnish. 

The  commercial  agency  is  strictly  a  credit  instrument 
— a  product  of  the  credit  regime.  Were  all  trade  and 
business  done  on  a  cash  basis,  there  would  be  no  need 
or  place  for  it.  It  has  grown  and  developed  in  the 
last  sixty  years  as  the  result  of  a  definite  need  and  an 
expressed  demand  on  the  part  of  the  business  world. 
While  the  result  of  the  credit  system,  however,  it  has  in 
its  turn  been  instrumental  in  the  vast  extension  of  credit 
transactions  and  the  resultant  increase  of  business  oper- 
ations in  the  last  half  century. 

The  commercial  agency  had  its  origin  in  the  panic  of 


AGENCY    METHODS 


1837.  The  immense  losses  incurred  during  this  period  of 
wildcat  mx)ney  and  mushroom  banks  by  merchants  all 
over  the  East,  especially  in  New  York,  which  at  that 
time  was  the  mercantile  center  of  the  country's  whole- 
sale business,  made  it  absolutely  incumbent  on  them  to 
devise  some  means  by  which  they  could  determine  what 
mercliants  were  safe  credit  customers.  Although  at  the 
time  selling  on  credit  was  not  so  widely  practiced  or 
plentifully  supplied  with  determining  and  safeguarding 
facilities  as  now,  the  time  of  the  individual  credits 
granted  was  much  longer.  It  was  nothing  unusual  to 
give  a  year's  time  for  the  payment  of  an  invoice  of 
goods,  and  six  months  was  the  usual  allowance. 

CAUSES  which  determined  the  origin  and  growth  of 
modern  commercial  agencies — how  a  response  to  a 
fdt  need  brought  about  their  establishment. 

Before  this,  the  practice  had  been  to  keep  represen- 
tatives on  the  road  whose  duty  it  was  to  visit  those  of  its 
customers  who  were  in  any  way  accessible  every  six  or 
twelve  months,  make  a  more  or  less  careful  examination 
of  their  financial  circumstances,  and  report  their  infor- 
mation and  conclusions  to  the  house.  Personal  inter- 
views with  customers  were  believed  in  and  depended 
upon  to  a  large  extent  in  the  determination  of  their 
reliability.  For  at  that  time  the  retail  merchant,  if  he 
was  within  the  confines  of  civilization,  paid  his  regular 
annual  or  semi-annual  visit  to  New  York,  Philadelphia, 
or  whatever  city  was  the  mercantile  center  of  his  dis- 
trict, and  did  his  buying  in  person.  Thus  the  head  of 
the  wholesale  concern  was  personally  acquainted,  and 
probably  even  a  friend — for  they  mingled  social  with 
business  relations  in  these  visits — of  many  of  his  cus- 
tomers, and  acquired  a  close  familiarity  with  their  cir- 


54 DEPARTMENT    ORGANIZATION 

cumstances  and  even  established  a  personal  bond  be- 
tween them  and  himself. 

The  wealmess  of  these  methods  lay  in  the  fact  that 
just  those  of  a  firm's  customers  concerning  whom  it  most 
needed  information,  and  who  required  the  closest  watch- 
ing, were  not  reached  at  all.  This  was  before  the  days 
of  railroads  and  telegraphs.  New  York  houses  were 
shipping  goods  into  the  wilderness  of  Ohio  and  Ten- 
nessee, even  away  across  the  unknown  continent  to  the 
coast.  Nothing  could  be  learned  regarding  the  status  of 
these  customers,  the  goods  themselves  were  in  transit 
three  or  six  months  before  reaching  the  consignee,  and  a 
year  might  elapse  before  the  firm  even  knew  of  their  safe 
arrival.  But  these  two  methods  were  not  even  satis- 
factory as  applied  to  those  customers  reached  by  them. 
The  firm's  reporters  were  far  away,  they  could  make 
only  a  cursory  examination,  and  only  at  long  intervals 
and  at  great  expense,  while  the  impressions  derived  from 
personal  contact  with  customers  were  not  infallible. 

In  response  to  needs  of  such  conditions,  made  acute  by 
the  heavy  losses  of  the  panic  of  '37,  came  the  commercial 
agency.  It  was  not  then  what  it  is  now.  Its  reports 
were  meager.  Its  lists  were  incomplete.  Its  judgments 
and  conclusions  were  necessarily  often  based  on  incom- 
plete and  false  data. 

Time,  experience  and  the  momentum  of  long  years, 
however,  have  remedied  many  of  these  defects,  until 
now  the  commercial  agency  plays  a  most  important  and 
weighty  part  in  the  business  world.  It  has  realized  that 
absojute  disinterestedness  and  impartiality  are  necessary 
for  the  making  of  reliable  ratings;  it  treats  all,  small 
and  great,  equally  as  to  rating  and  service ;  its  informa- 
tion is  secured  and  judgment  made  therefrom,  by  the 
most  experienced,  careful  and  unprejudiced  men. 


AGENCY    METHODS 35 

The  information  which  the  agency  affords  is  "given  in 
three  forms:  A  quarterly  book  is  issued  by  the  agency, 
containing  the  name,  the  business,  the  capital  rating  and 
the  credit  rating  of  every  firm  or  individual  in  this 
country  or  Canada  that  has  established  credit  relations. 
The  agencies  supply  no  information  concerning  private 
individuals  or  such  as  do  not  follow  a  strictly  mercantile 
calling.  In  the  second  place,  daily  sheets  are  published 
by  the  agency,  in  which  are  noted  all  failures  or  bank- 
ruptcies, new  incorporations,  the  establishment  of  new 
business  houses  and  changes  in  ownership.  Lastly,  the 
agency  furnishes  what  are  called  special  reports  con- 
cerning any  firm  or  individual  engaged  in  business,  on 
specific  request  from  an  agency  subscriber. 

SUBSCRIBERS  to  commercial  agencies  receive  rating 
books,  daily  sheets,  and  the  privilege  of  special  reports 
— the  service  of  an  organization  of  thousands  of  reporters 

Any  business  man  may  become  a  subscriber  to  an 
agency  by  the  payment  of  a  yearly  subscription,  in  re- 
turn for  which  he  receives  twice  a  year  the  rating  book 
and  the  daily  sheets ;  in  addition,  he  has  the  privilege  of 
requesting  special  reports  on  any  individual  or  firm 
rated  at  a  slight  cost  per  report.  Request  for  such  re- 
ports must  be  made  out  on  a  special  blank  supplied  by 
the  agency,  on  the  understanding  that  the  information 
asked  for  is  to  be  used  for  a  strictly  legitimate  mercantile 
purpose,  and  for  no  other,  and  is  to  be  kept  secret.  This 
pledge  is  necessary  in  order  to  prevent,  so  far  as  possible, 
those  who  are  not  subscribers  from  participating  in  the 
benefits  of  the  agency 's  service,  and  to  guard  against  the 
use  of  the  information  for  some  ulterior  or  malicious 
purpose. 

A  special  report  contains   the   detailed  information 


36 DEPARTMENT    ORGANIZATION 

about  a  particular  individual  or  firm :  the  character  of 
the  individual  involved,  as  judged  by  his  past  history, 
life,  habits  and  reputation ;  his  ability,  as  judged  by  his 
business  record  and  the  present  condition  of  his  affairs-, 
his  wealth,  not  only  that  invested  in  the  particular  busi- 
ness under  consideration,  but  any  other  property  or  in- 
terests which  he  may  have ;  his  debts,  so  far  as  they  can 
be  arrived  at;  his  general  social  and  business  circum- 
stances and  connections — information  on  all  these  sub- 
jects is  presented.  Then  follow  details  more  particularly 
concerning  the  business  in  question,  aa  distinguished 
from  the  man  or  men  behind  it:  the  capital,  the  out- 
standing accounts,  the  debts  and  their  character,  the 
amount  and  nature  of  the  business  done,  the  firms  from 
whom  goods  are  bought  and  to  whom  money  is  owned, 
the  existence,  if  any,  of  secured  creditors,  and  general 
statements  regarding  the  business.  The  whole  report  is 
concluded  by  a  general  statement  concerning  the  worth 
of  the  individual,  the  extent  to  which  he  can  be  trusted, 
and  the  manner  in  which  he  should  be  handled. 

The  credit  man  to  whom  this  report  comes  sees  not 
only  the  details  presented,  but  his  knowledge  and  ex- 
perience tell  him  much  more  and  enable  him  to  read  in 
the  report  facts  not  outwardly  apparent,  and  to  put  the 
facts  given  into  their  proper  relation.  A  special  report 
is  not  intended  to  be  a  complete  basis  from  which  the 
credit  man  shall  make  his  judgment ;  it  is  put  in  such  a 
form  that,  combined  with  his  own  knowledge,  experience 
and  insight,  he  may  reach  a  definite. conclusion. 

How  is  this  information,  given  to  the  credit  man  in 
the  three  forms  of  quarterly  books,  the  daily  sheets, 
and  the  special  reports,  secured  by  the  agency  ?  To  tell 
this  it  will  be  best  to  begin  with  the  last,  the  special  re- 
port. 


AGENCY    METHODS  37 


The  agency  has  an  organization  of  thousands  of  re- 
porters who  are  constantly  gathering  facts  concerning 
mercantile  houses.  In  the  large  cities  of  the  country, 
where  independent  district  offices  are  located,  a  force  of 
reporters  is  constantly  at  work.  The  work  is  specialized 
in  these  large  cities:  one  man  has  charge  of  each  line 
of  business  in  the  wholesale  trade,  and  the  territory  out- 
side of  the  business  center  of  the  city  is  divided  up  into 
districts,  to  each  of  which  a  reporter  is  assigned.  These 
reporters  are  kept  at  the  same  post  for  years  and  be^ 
come  thoroughly  familiar  with  the  detailed  facts  and 
conditions  of  their  line  of  business  or  their  districts,  and 
with  the  houses  and  individuals  in  them.  They  keep 
track  of  and  report  to  their  managers  the  latest  mer- 
cantile developments,  tendencies,  rumors,  and  even  im- 
pressions, which  they  obtain. 

Each  of  the  district  offices  has  sub-offices  in  lesser 
cities  attached  to  it,  numbering  from  two  to  eight,  de- 
pending on  the  size  of  the  territory  and  importance  of 
its  business  transactions.  Each  sub-office  has  oversight 
over  the  territory  around  it,  organizes  it  into  reporting 
districts,  and  keeps  track  of  its  commercial  affairs  just  as 
the  offices  in  the  larger  cities  do  in  their  territory.  Thus, 
the  sub-office  at  Peoria,  having  charge  also  of  certain 
smaller  towns  and  the  territory  around  it,  has  several 
reporters  always  attached  to  it,  who  constantly  make  the 
rounds  of  this  territory,  just  as  the  city  man  does  in  his 
district. 

In  addition  to  these  district  reporters,  the  agency  has 
in  its  employ  in  the  majority  of  towns  where  there  is 
neither  a  district  nor  sub-office  an  attorney,  whose  duty 
it  is  to  report  into  the  sub-office  straight  news  items,  such 
as  failures,  new  businesses  and  changes  in  ownership, 
which  cannot  wait  for  the  visit  of  the  regular  reporter, 


38 DEPARTMENT    ORGANIZATION 

and  also  to  make  special  reports  in  urgent  cases.  These 
men  do  not,  of  course,  give  all  their  time  to  the  work  of 
the  agency.  Every  hamlet  and  almost  every  mercantile 
business,  regardless  of  size,  is  thus  covered  by  this  sys- 
tem of  reporters  and  representatives. 

CLASSIFICATION  of  the  work  perfarmed  by  the 
commercial  agency  reporters;  the  source  of  their 
credit  information;  how  the  territory  is  divided. 

The  reporters  make  their  reports  regularly,  the  district 
city  reporters  daily,  the  country  reporters  periodically 
at  longer  intervals.  The  work  they  do,  or  the  informa- 
tion they  collect,  may  be  divided  into  three  classifica- 
tions. First,  they  report  the  strictly  news  items  which 
are  used  for  making  up  the  daily  sheets.  Such  items, 
when  they  come  up  in  sub-offices,  must,  of  course,  at  once 
be  telegraphed  to  the  district  office  from  which  the 
daily  sheets  are  issued.  The  agency  has  a  telegraphic 
code  of  its  own,  which  is  always  used  in  making  reports 
of  any  kind  by  wire.  This  assures  the  absolute  secrecy 
of  the  information  and  effects  great  economy  in  the  ex- 
pense of  transmission. 

.Second,  the  reporters  give  an  account  of  what  may  be 
called  their  impressions — that  is,  it  may  seem  to  them 
that  a  business  is  retrograding;  that  the  owner  or  man- 
ager is  growing  careless ;  that  the  stock  is  being  allowed 
to  degenerate,  or  some  man  may  tell  them  that  his  firm 
has  put  in  a  new  line,  increased  its  capital  or  made  some 
other  change.  All  these  items  appear  in  the  periodic  re- 
ports which  the  reporter  makes. 

The  third  duty  of  the  reporters  is  to  make  the  special 
reports  which  are  called  for.  Thus,  if  a  request  comes 
into  the  Chicago  district  office  for  a  special  report  on  a 
merchant   in    Galesburg,    and    there   is    no    recent    re- 


AGENCY    METHODS 


port  on  file  in  the  office,  this  request  is  referred  to  the 
Peoria  sub-office,  in  whose  district  Gralesburg  is  situated, 
and  a  reporter  from  that  office  looks  up  the  merchant 
and  makes  the  report.  Reports  grow  out  of  either  a 
specific  request  from  a  subscriber,  or,  as  is  more  gen- 
erally the  case  when  a  new  business  is  organized,  the 
agency  at  once  sends  a  reporter  to  get  a  report  on  the 
new  concern,  not  only  that  it  may  have  a  report  ready 
should  it  be  called  for,  but  also  that  it  may  insert  the 
new  house;  with  proper  ratings,  in  the  next  quarterly 
book. 

"When  these  special  reports  come  into  the  district  office 
they  are  manifolded,  and  if  they  are  of  sufficient  im- 
portance, that  is,  if  it  is  probable  that  the  firm  investi- 
gated will  seek  credit  in  some  other  districts,  a  duplicate 
of  the  report  is  sent  to  those  district  offices,  where  they 
are  kept  on  file  and  sent  out  in  response  to  inquiries. 

The  information  in  the  reports  is  obtained  from  two 
sources,  direct  and  indirect.  A  statement  is  obtained 
from  the  individual  or  firm  under  investigation,  who  is 
asked  a  regular  series  of  questions  regarding  his  past 
history,  capital,  open  accounts,  debts,  and  so  on.  This 
information  the  reporter  will  judge,  qualify  and  amplify 
from  quick  personal  impressions  which  he  gets  concern- 
ing the  individual  and  whatever  part  of  the  business  he 
sees.  Then  some  information  is  obtained  indirectly,  from 
other  people,  from  the  past  knowledge  of  the  reporter 
and  the  agency  concerning  the  person  in  question,  and 
from  hints  and  impressions  picked  up  here  and  there. 

Of  late  years  the  custom  has  grown  of  obtaining  the 
signature  of  the  individual  investigated  to  the  financial 
statement  which  he  himself  makes.  If  this  statement  is 
proved  in  any  later  development  to  have  been  purposely 
falsified,  the  party  is  legally  liable  for  obtaining  goods 


40 DEPARTMENT    ORGANIZATION 

under  false  pretenses,  since  the  acknowledged  purpose 
of  such  a  report,  it  is  always  understood,  is  to  afford  a 
basis  for  the  extension  of  credit.  The  credit  man  who 
has  such  a  signed  statement  before  him  in  deciding  upon 
the  extension  of  credit  has  something  tangible  and  sound 
to  act  upon,  and  his  judgment  is  facilitated  thereby. 

The  special  reports  kept  in  stock  are  corrected  peri- 
odically— regularly  twice  a  year.  Except  in  special  cases 
the  agency  does  not  undertake  to  give  other  than  the 
stock  report  on  hand  when  one  is  called  for ;  nor  is  it  ex- 
pected, for  generally  special  reports  are  wanted  at  once 
without  delay ;  in  most  cases  their  value  to  a  credit  man 
would  be  lost  entirely  if  there  were  more  than  a  couple 
of  hours'  delay  in  securing  them. 

HOW  the  work  of  the  reporters  is  verified  and  supple- 
mented by  information  secured  from  other  sources; 
how  business  men's  ratings  are  finally  determined. 

The  agency  has  other  sources  of  information  besides 
its  reporters.  In  the  district  offices  a  force  of  clerks  is 
constantly  at  work  examining  the  state  reports  of  in- 
corporations and  the  court  reports  of  bankruptcies,  and 
even  of  suits  brought  against  firms,  for  a  man's  financial 
standing  can  often  be  judged  by  the  suits  brought 
against  him.  Trade  and  financial  publications  and  the 
newspapers  are  also  examined"  carefully  and  system- 
atically, and  often  afford  information. 

The  facts  thus  obtained  for  the  daily  sheets  serve  as 
the  basis  and  material  for  the  corrections  in  the  rate 
book  issued  by  the  agency  in  revised  form  every  three 
months.  As  news  of  additions,  changes  or  subtractions 
in  regard  to  the  business  houses  of  the  country  are  re- 
ceived, or  as  information  warranting  a  change  of  rating 
comes  in  to  a  district  office,  the  necessary  corrections  are 


AGENCY    METHODS 41 

at  once  indicated  on  the  last  rate  book,  and  at  the  end  of 
every  three  months  these  corrections  are  gathered  to- 
gether and  a  new  book  incorporating  them  is  issued. 

Two  ratings  are  given  in  the  rate  book  for  each  busi- 
ness house  rated — capital  rating,  which  indicates  the  ap- 
proximate amount  of  capital  invested  in  the  business, 
and  the  credit  rating,  which  is  the  judgment  of  the 
agency  as  to  the  confidence  which  can  be  placed  in  the 
individual  or  firm  rated.  These  ratings  are  usually  in- 
dicated, not  by  figures  or  words,  but  by  short  abbrevia- 
tions. The  absence  of  either  rating  opposite  any  name 
does  not  necessarily  indicate  a  very  poor  condition,  but 
merely  means  that  for  some  reason  or  other  the  agency 
has  not  been  able  to  obtain  information  upon  which  to 
base  a  judgment. 

How  are  these  ratings  made  ?  This  is  the  delicate  and 
most  critical  point  in  an  agency's  business.  The  capital 
rating  does  not  merely  represent  the  statement  made  by 
the  interested  individual  himself  to  the  agency  reporter; 
it  is  not  even  the  amount  of  cash  known  to  be  invested 
in  the  business,  nor,  if  it  be  a  corporation,  the  amount 
of  the  nominal  or  paid-up  stock.  The  capital  rating  is 
really  the  judgment  of  the  rater  as  to  the  amount  of 
commercial  value  or  the  par  value  of  the  assets  which 
the  firm  rated  may  be  considered  to  have  in  its  busines.^, 
all  things  regarding  the  firm  and  the  business  taken  into 
consideration.  The  capital  rating  really  purposes  to  es- 
timate what  this  business  is  worth  in  money,  its  realiz- 
able net  value.  The  invested  capital  or  the  capital  stock 
of  a  firm  may  remain  unchanged  from  year  to  year  and 
yet  its  capital  rating  may  be  changed  time  and  again  in 
the  agency's  quarterly  book  during  this  time. 

In  like  manner,  the  credit  rating  does  not  merely 
indicate  a  certain  fixed  percentage  of  the  capital  in- 


42 DEPARTMENT    ORGANIZATION 

vested  for  which  the  average  business  man  may  be  con- 
sidered good.  This  rating,  even  more  than  the  capital 
rating,  is  the  judgment  of  the  rater,  all  things  con- 
sidered, as  to  the  confidence  which  can  be  placed  in  this 
man  or  firm.  It  is  the  result  of  a  careful  study  of  this 
man's  character,  his  present  social  and  commercial  con- 
dition, his  business  history  for  a  score  of  years  past.  It 
is  the  rater's  opinion  of  the  man's  integrity  and  re- 
sources expressed  in  terms  of  money. 

That  the  commercial  agency  fills  a  need  and  occupies 
a  legitimate  place  in  the  business  world  is  proved  by  the 
immense  expansion  of  its  functions  and'  activities  in  the 
'last  half  century,  the  vast  extension  of  credit  operations 
in  the  same  period,  and  the  trust  and  confidence  reposed 
in  it.  This  description  of  its  internal  organization,  its 
scope  and  its  volume  of  detail  is  the  best  evidence  of  the 
place  it  fills  in  the  credit  world ;  it  is  the  most  indispensa- 
ble, the  oftenest  used  and  the  most  versatile  tool  with 
which  the  credit  man  is  equipped. 


^ 


A  MAN  who  aims  at  business  success  must  become  a  master 
•^^  of  system.  A  business  man  vnthout  system  is  like  a 
ship  vnthout  a  rudder.  System  not  only  helps  you  to  steer 
your  business  craft  on  a  straight  course,  but  increases  its 
speed.  It  saves  time,  it  saves  waste,  it  insures  accural  and 
dispatch.  With  system  there  is  almost  no  end  to  what  a 
man  may  do;  vnthout  it  he  is  a  slave  to  detail,  confined  to 
the  narrow  limits  of  his  own  hands. 

—Walter  H.  Cottingham 

President,  Sherwin-Williams  Company 


IV 
CREDIT  INSURANCE 

By  T  J.  Zimmerman 

CREDIT  insurance  is  the  application  of  the  princi- 
ples of  indemnification  for  losses  to  the  risk  in- 
curred in  the  extension  of  credit  for  merchandise  sold. 
In  the  theory  of  its  present  practitioners,  it  is  a  guaran- 
tee to  reimburse  a  business  man  for  losses  sustained 
from  bad  debts  over  and  above  a  certain  specified  normal 
amount  and  within  agreed  limitations. 

In  the  treatment  of  this  subject,  consideration  will 
first  be  given  to  the  premises  on  which  the  idea  of  credit 
insurance  is  based.  A  description  of  the  plan  and  method 
by  which  it  is  actually  carried  out  in  practice,  and  a  dis- 
cussion of  its  merit  and  value,  its  deficiencies  and  weak- 
nesses, as  thus  practiced,  will  follow. 

The  soundness  and  legitimacy  of  the  general  prin- 
ciple of  insurance  have  been  established.  The  founda- 
tion underlying  all  insurance  is  the  same.  It  is  an  ar- 
rangement by  which  unexpected  and  incomputable  bur- 
dens and  losses  are  equitably  distributed  among  a  large 
number.  An  associated  group  of  men  affords  to  each  of 
its  members  protection  against  unlooked-for  casualties; 
each  must  pay  for  having  his  risk  assumed  by  the  others ; 
the  official  organization  or  company  is  simply  the  agent 
to  collect  the  premiums  and  distribute  the  losses.  All 
insurance  is  based  on  the  law  of  averages.    Nothing  is  so 


44 DEPARTMENT    ORGANIZATION 

uncertain  as  the  future  loss  on  a  specific  risk,  nothing  so 
certain  as  the  average  future  loss  on  all  risks.  Insurance 
is  based  only  on  unexpected  losses,  such  as  cannot  be 
computed  in  advance.  Thus,  insurance  on  property, 
called  broadly  fire  insurance,  insures  against  fire  and 
at  times,  loss  by  cyclones,  floods  and  other  catastrophes ; 
but  it  does  not  insure  against  regular  wear  and  tear,  de- 
preciation or  a  decrease  in  the  value  of  goods,  insur- 
ance applies  only  to  risks,  not  to  specific  circumstances. 
All  possible  precautions  are  of  course  taken  against  such 
unexpected  loss;  buildings  are  built  as  nearly  fireproof 
as  possible,  and  provided  with  all  kinds  of  appliances 
for  extingULshing  fires,  regulations  are  enforced  regard- 
ing the  storing  of  inflammable  material  and  the  oper- 
ation of  dangerous  enterprises;  efficient  fire  depart- 
ments are  kept  up ;  care  is  even  taken  to  guard  against 
incendiarism.  Yet  risk  remains,  and  while  these  pre- 
cautions lower  the  risk,  and  hence  the  cost  of  protecting 
the  risk,  it  must  be  insured  against. 

INSURANCE  of  losses  beyond  the  amount  expected  %n 
the  ordinary  course  of  trade  defines  the  scope  and 
the   principle   underlying   credit   insurance. 

Credit  insurance  has  all  the  earmarks  of  fire  or  life 
insurance.  Business  operations  to-day  rest  on  credit. 
All  credit  operations  involve  a  chance  of  loss,  for  any 
exchange  of  money  or  goods  in  which  both  parties  do  not 
deliver  their  commodities  at  the  same  moment,  entails 
some  risk  to  the  party  who  delivers  first. 

Now,  the  business  man  of  to-day,  working  against  the 
most  pressing  competition  and  on  a  small  margin  of 
profit,  must  know  his  exact  costs  and  expenses.  His  cost 
estimates  must  be  so  carefully  computed  that  he  can  be 
absolutely  certain,  if  he  sells  at  a  certain  figure,  he  will 


CREDIT    INSURANCE 45 

make  a  certain  profit.  Other  things  being  equal,  his  suc- 
cess will  then  depend  on  two  factors :  the  accuracy  of  his 
cost  calculation  and  his  protection  against  unexpected 
losses.  His  losses  can  be  of  two  kinds:  losses  incurred 
while  his  goods  are  still  in  his  possession,  that  is,  by  fire 
— this  every  business  man  will  guard  against  by  carrjdng 
fire  insurance ;  and  losses  incurred  after  the  goods  have 
left  his  custody,  that  is,  through  bad  debts  made  by  ex- 
tending credit.  What  more  logical  than  that  this  risk, 
too,  should  be  protected  by  insurance? 

In  both  property  and  credit  loss  there  is  a  certain 
normal  which  the  business  man  charges  into  his  cost  ac- 
count. Thus,  necessary  and  unavoidable  depreciation  in 
buildings  and  stock  is  taken  into  consideration  in  esti- 
mating total  expense,  and  among  the  many  charges  of 
care-taking  and  wear,  are  included  fire  insurance  premi- 
ums. This  cost  will  vary  with  the  kind  of  business 
and  its  management,  but  the  merchant  knows  from 
his  previous  year's  record  exactly  what  these  items  will 
amount  to.  In  the  same  way  there  is  a  certain  normal 
for  bad  debts,  varying  little  from  year  to  year,  depend- 
ing on  the  kind  of  business,  the  class  of  customers  dealt 
with,  and  the  perfection  of  the  organization  in  charge  of 
the  credits.  This  normal  loss,  averaged  from  previous 
years*  figures,  as  unvarying  as  depreciation,  is  properly 
part  of  the  expense  of  doing  business,  and  must  be  fig- 
ured in  with  total  production  costs.  A  certain  prefigured 
normal  loss  is  really  not  a  loss  at  all ;  it  is  not  felt  in  the 
business ;  it  is  expected  and  provided  for  like  a  weekly 
pay  roll. 

But,  in  addition  to  this,  business  done  on  credit  is 
always  open  to  unlooked-for  excess  losses  beyond  the 
natural  expectancy  in  the  ordinary  course  of  trade,  just 
as  it  is  liable  to  unexpected  property  losses.     The  na- 


46 DEPARTMENT    ORGANIZATION 

tural  sequence  is  that  this  excess  loss  should  be  insured 
against  just  as  is  excess  loss  on  a  firm's  property.  Fire 
insurance,  then,  protects  goods  when  they  are  in  the 
possession  and  title  of  the  seller;  credit  insurance  pro- 
tects them  when  title  and  possession  have  passed  to  an- 
other, without  an  equivalent  having  been  received.  The 
basis  of  both  kinds  of  insurance  is  the  same,  the  law  of 
averages  as  applied  either  to  fire  or  to  bad  debt  losses, 
and  the  data  for  both  bases  are  gathered  in  the  same 
way  and  from  equally  reliable  sources — they  are  the 
general  experience  and  exact .  average  figures  of  the  past 
combined  with  specific  facts  relating  to  the  individual 
risk  under  consideration. 

The  banker  who,  with  $1,000  to  loan,  and  the  choice 
between  a  7  per  cent  interest  with  poor  security  and  a 
5  per  cent  interest  with  gilt-edge  security,  takes  the 
latter,  probably  does  not  realize  that  he  is  paying  30 
per  cent  of  his  possible  profit  for  collateral,  and  he  feels 
and  knows  that  he  is  getting  value  received.  Or,  putting 
it  in  another  way,  he  is  paying  $20  a  year  for  insurance 
on  this  loan. 

The  credit  insurance  company  stands  in  the  same  re- 
lation to  the  merchant  as  the  indorser  does  to  the  banker. 
Credit  insurance  affords  collateral  on  every  bill  of  goods 
sold  by  a  merchant  on  credit.  In  sending  out  a  consign- 
ment of  goods  on  credit,  a  house  is  really  loaning  money 
to  the  amount  of  the  value  of  the  goods;  the  insurance 
company  puts  up  the  collateral  on  this  loan.  Just  as  an 
indorser  investigates  the  condition  of  a  man  on  whose 
bond  he  goes,  so  the  credit  insurance  company  investi- 
gates the  firms  on  whose  credits  it  affords  insurance,  ex- 
cept that  it  does  this  by  a  different  method. 

The  plan  of  credit  insurance,  therefore,  is  based  on 
the  principle  that  there  is  always  some  loss  from  bad 


CREDIT    INSURANCE 47 

debts  in  every  business;  that,  while  in  no  specific  case 
can  the  excess  loss  over  this  normal  be  calculated,  it  can 
be  averaged  for  the  aggregate  of  a  large  number  of 
houses,  and  that,  consequently,  this  excess  loss  can  be 
insured  against. 

This  is  the  idea,  the  principle,  of  credit  insurance. 
How  is  it  carried  into  practice?  What  is  the  actual 
method  of  operation  of  credit  insurance  companies  of 
to-day  ? 

METHODS  used  by  credit  underwriters  to  investigate 
insurance  risks;  how  normal  losses^  the  amount  of 
the  bond  and  the  premium  rate  are  determined. 

When  application  is  made  for  credit  insurance,  an 
underwriter  at  once  takes  up  the  investigation  of  the 
risk,  just  as  in  fire  insurance  an  underwriter  investi- 
gates the  condition  of  the  property  to  be  insured.  Three 
decisions  are  to  be  reached :  What  sum  is  to  be  fixed  as 
the  normal  loss  of  this  house,  above  which  losses  will  be 
indemnified;  what  is  to  be  the  per  cent  and  fixed  limit 
of  indemnification,  and  what  is  to  be  the  premium  per 
year? 

The  mercantile  agencies  have  through  their  long  in- 
vestigations gathered  together  a  mass  of  reliable  and 
valuable  data,  relating  on  the  one  hand  to  general  facts, 
on  the  other  to  specific  business  concerns.  Such  careful 
statistics  of  failures  have  been  compiled  that  the  com- 
mercial mortality,  classified  according  to  different  busi- 
nesses, different  localities  and  different  commercial  con- 
ditions, is  as  thoroughly  understood  and  tabulated  as 
human  mortality  or  average  fire  loss.  These  statistics 
the  insurance  underwriters  have  at  hand.  In  addition, 
the  mercantile  agencies  can  give  them  specific  informa- 
tion regarding  the  house  in  question — the  general  con- 


48 DEPARTMENT    ORGANIZATION 

dition  of  the  house,  the  character  of  its  trade,  the  class 
and  location  of  its  customers,  all  bearing  on  its  credit 
conditions. 

Finally,  the  house  itself  is  investigated  from  the  in- 
side. It  must  show  a  schedule  of  its  losses  during  past 
years.  The  books  are  examined  to  determine  the  class  of 
customers,  the  volume  of  business,  the  size  of  accounts, 
the  terms  on  which  goods  are  sold,  the  general  credit 
policy  and  the  run  of  collections.  The  real  determina- 
tion of  insurance  terms  depends  on  these  elements  of 
live  hazard  entering  into  the  policy.  From  all  these 
facts,  the  normal  loss,  the  amount  of  the  bond  and  the 
premium  rate  are  determined. 

For  clearness  let  us  cite  an  imaginary  case :  The  gross 
sales  of  a  house  amount  to  $400,000 ;  the  normal  loss  is 
placed  at  one-half  of  1  per  cent,  $2,000;  the  bond  taken 
out  is  $10,000,  on  which  the  premium  is  4  per  cent,  $400. 
In  this  case,  if  the  aggregate  loss  of  the  house  from  bad 
debts  is  under  $2,000,  the  firm  recovers  nothing;  any  ex- 
cess loss  over  $2,000  up  to  $10,000  is  recoverable  in  full, 
within  certain  restrictions.  These  restrictions  are  regu- 
lated by  the  credit  standing  and  capital  of  customers  to 
which  a  firm  extends  credit.  ''Rated"  customers — that 
is,  those  having  a  capital  rating  followed  by  a  first  or 
second  credit  rating — are  covered  for  100  per  cent  up  to 
an  agreed  percentage  of  their  capital ;  '  *  off -rated, '  *  those 
having  a  lower  rating  than  the  former,  or  none  at  all, 
are  covered  for  only  a  part  of  loss  sustained  through 
them,  up  to  the  same  capital  percentage. 

Such  is  the  present  operation  of  credit  insurance.  Is 
it  to  be  recommended  for  the  use  of  the  business  man  of 
to-day?  Its  followers  allege  many  advantages.  Oedit 
insurance  gives  the  business  man  control  over  his  costs ; 
secure  through  his  insurance  from  excess  losses,  he  need 


^^__ CREDIT    INSURANCE 49 

merely  add  his  normal  loss  and  his  premium  to  his  other 
fixed  expense  items  to  ascertain  the  exact  production 
costs.  He  can  thus  compute  his  profits  with  absolute  cer- 
tainty. The  last  unknowable  hazard  is  wiped  out.  He 
knows  his  resources  exactly  and  what  he  can  count  on, 
since  his  book  credits,  formerly  a  doubtful  quantity,  are 
now  a  recoverable  asset.  The  certainty  and  assurance 
which  this  condition  of  affairs  gives  him  allows  him  to 
build  more  securely  and  farther  into  the  future,  and  to 
meet  competition  fearlessly  and  aggressively.  He  can 
figure  more  closely,  having  more  certain  knowledge  of 
his  costs;  not  having  constant  worry  of  bad  debts  over 
him,  his  mind  is  clearer  and  cooler. 

ALLEGED  advantages  of  credit  insurance  in  actual 
(yperation;  increase  of  sales,  admission  of  wider  op- 
portunities,  promotion   of  the  credit  man's    efficiency. 

The  inevitable  tendency  of  such  a  policy  will  be  to 
increase  sales  in  so  far  as  they  emanate  from  the  credit 
department.  Not  only  will  the  credit  man  be  able  to  ex- 
tend his  credits  in  some  directions — not  in  all,  as  will  be 
explained — become  more  fearless  and  embrace  wider  op- 
portunities because  he  has  someone  with  whom  to  divide 
responsibilities  and  losses,  but  he  will  worry  less  and 
hence  be  more  fit  for  his  work.  Once  a  decision  is  made, 
if  the  credit  extended  complies  with  the  terms  of  his 
bond,  the  credit  man  knows  he  can  sustain  no  loss.  And 
if  an  unexpected  and  unavoidable  loss  falls  upon  the 
house,  he  will  not — as  often  happens — go  to  the  opposite 
extreme  of  ultra-conservatism  and  turn  down  many  good 
orders. 

The  insurance  policy,  rather  than  making  a  credit 
man  careless,  forces  him  to  keep  closer  watch  of  his  cus- 
tomers and  their  accounts,  and  so  tends  to  better  his 


50 DEPARTMENT    ORGANIZATION ^ 

credit-making,  since,  to  avail  himself  of  the  insurance 
offered,  he  will  live  up  to  the  requirement  of  his  bond. 
He  must  watch  the  changes  in  the  capital  and  credit- 
making  of  his  customers,  for  the  insurance  coverage  is 
based  on  the  latest  information  concerning  these  fluctuat- 
ing items.  He  must  keep  close  watch  of  the  amount  of 
credit  given,  as  shown  by  his  ledgers,  for  insurance 
ceases  above  a  certain  sum.  The  bond  thus  serves  as  a 
guide  in  making  credit.  Its  requirements  will  also  make 
him  keener  on  collections,  more  strenuous  in  holding 
customers  to  prompt  payment — in  itself  a  guard  against 
loss — for  he  may  not  be  able  to  grant  further  credit 
and  be  protected  on  it  until  back  bills  are  paid  up.  The 
credit  man's  eagerness  is  thus  held  inside  the  danger 
line,  and  carefulness,  the  very  opposite  of  recklessness, 
is  induced. 

A  further  curb  on  the  credit  man's  eagerness  is  the 
fact  that  he  always  has  the  endeavor  to  keep  his  losses 
inside  the  normal  amount,  for  now  more  than  ever  will 
a  small  percentage  of  loss  redound  to  his  credit,  for  it 
will  be  pure  surplus  for  his  house,  inasmuch  as  the 
normal  loss  has  already  been  calculated  into  the  cost 
estimate.  And  he  will  not  lose  sight  of  the  fact  that  on 
his  present  year's  record  will  depend  the  amount  of  his 
future  normal  loss  and  premium  rate.  He  will,  further- 
more, always  prefer  to  collect  from  the  debtor  rather 
than  the  insurance  company,  for,  as  in  fire  insurance,  a 
loss  means  much  more  than  the  money  involved;  it  car- 
ries with  it  the  trade  of  a  customer,  a  stain  on  the  credit 
man's  record,  a  black  mark  against  his  house. 

The  value  of  credit  insurance  must  depend  largely  on 
the  man;  its  weak  points  appear  plainly  in  the  very 
presentation  of  its  advantages.  It  can  be  abused  much 
more  easily  than  well  used.    To  a  credit  man  the  least  in- 


CREDIT    INSURANCE  51 


clined  to  shirk  his  responsibility  or  take  too  long  a 
chance  it  will  prove  fatal  and  against  the  best  interests 
of  his  house.  The  very  fact  that  he  is  dividing  responsi- 
bility and  putting  the  possible  loss  on  someone  else  will 
make  him  more  lenient  in  granting  credits.  The  specific 
facts  in  regard  to  a  customer  which  the  credit  man  must 
watch  to  keep  within  the  requirement  of  his  bond  are 
not  extremely  significant ;  the  bookkeeper  or  office  clerks 
can  keep  track  of  them.  And  a  credit  man  carrying  in- 
surance may  even  disregard  them  altogether,  figuring 
that  he  can  take  the  extra  chance  even  though  his  credit 
extensions  are  over-stepping  the  stipulations  of  his  bond. 
None  of  the  arguments  advanced  as  curbs  on  the  caution 
of  the  credit  man  will  stand  examination.  The  credit 
man's  house  will  not  be  liable  to  hold  a  loss  from  bad 
debts  against  him  if  it  is  covered  by  insurance,  provided 
he  can  show  that  he  has  increased  sales  by  taking  this 
chance.  Credit  insurance  companies  themselves  are  com- 
pelled to  confess  that  business  men  using  their  policies 
are  apt  to  try  to  make  money  off  them.  That  a  high 
loss  one  year  will  raise  their  future  normal  loss  and  pre- 
mium rate  will  not  be  likely  to  worry  credit  men.  In 
short,  the  weak  credit  man  is  quite  likely  to  be  further 
weakened  by  carrying  credit  insurance  and  to  substitute 
the  security  of  his  bond  for  good  judgment. 

It  is  often  questioned  if  credit  insurance,  as  now  con- 
ducted, has  any  value  to  the  strong,  able,  watchful  credit 
man,  and  whether  it  does  not  constitute  a  burden  on 
him  for  the  benefit  of  his  weaker  brother.  Under  the 
present  insurance  policy  the  credit  man  really  does  not 
make  his  own  credits,  and  does  not,  therefore,  make 
credits  on  a  proper  basis.  On  the  one  hand,  if,  hesitat- 
ing to  grant  a  doubtful  credit,  he  does  extend  it  be- 
cause the  case  is  covered  by  his  bond,  surely  in  this  case 


52 DEPARTMENT    ORGANIZATION 

it  is  not  his  judgment,  but  the  protection  of  the  bond, 
that  makes  the  credit.  On  the  other  hand,  refusing 
against  his  own  better  personal  judgment  to  grant  credit 
because  such  extension  will  for  some  reason  not  come 
under  his  policy  requirements,  here  again  it  is  not  he 
who  is  making  the  credit. 

If  the  normal  loss  of  a  large  firm  for  a  long  period  of 
years  has  averaged  a  certain  percentage  of  its  gross  sales, 
it  may  well  wonder  why  it  should  pay  out  a  considerable 
sum  of  money  to  be  protected  against  a  loss  above  this 
normal,  for  it  is  extremely  probable  that,  even  though  in 
some  one  year  its  losses  will  exceed  this  percentage,  the 
average  of  the  next  decade  will  be  no  higher,  and  its 
premium  will  only  be  so  much  additional  to  be  charged 
to  the  loss  account. 

But  these  arguments  are  all  against  the  present  meth- 
ods of  operation  in  credit  insurance,  rather  than  against 
the  principle  itself.  It  is  the  methods  of  credit  insur- 
ance companies  of  to-day  that  have  come  under  criti- 
cism; faulty  methods  due  in  part,  perhaps,  to  the  fact 
that  the  movement  is  still  young  and  that  underlying 
principles  and  operative  methods  are  still  in  an  unsettled 
state,  but  also  to  what  many  consider  the  inherently 
wrong  basis  on  which  they  are  conducted. 

WEAK  points  and  dangers  in  credit  insurance — 
difficulties  in  carrying  out  the  theory,  the  doubtful 
value  of  credit  insurance  in  preventing  panics. 

The  great  trouble  with  the  present  methods,  and  the 
reason  that  they  have  received  so  little  commendation 
from  thinking  men,  is  their  generality,  a  characteristic 
which  destroys  almost  entirely  their  analogy  to  fire  in- 
surance. In  the  latter,  the  companies  do  not  divide  risks 
into  a  certain  number  of  classes  and  place  each  piece  of 


CREDIT    INSURANCE  53 


property  insured  in  one  or  the  other  of  these  classes,  but 
each  risk  taken  is  carefully  investigated  in  itself  and 
special  regulations  and  figures  applied  to  it.  The  fire 
insurance  company  knows  exactly  what  it  undertakes  in 
every  case. 

If  the  credit  insurance  companies  did  the  same,  that 
is,  if,  when  a  credit  man  wa^  considering  the  extension 
of  credit  to  a  certain  applicant  and  wished  to  be  secured 
on  the  risk,  the  credit  insurance  company  should  come 
and  investigate  the  risk,  determine  whether  or  not  it 
wished  to  take  it,  and  name  a  premium^  rate  specific  to 
this  one  risk,  then  the  insurance  would  not  interfere  with 
the  credit  making  of  the  credit  man  or  even  with  his 
judgment,  nor  would  the  insurance  company  be  working 
in  the  dark,  as  it  virtually  appears  to  be  now.  It  seems 
absurd  that  the  insurance  company  should  take  the 
ratings  in  the  rating  books  as  its  foundation  for  opera- 
tion, ratings  which  not  even  the  publishers  of  these  books 
themselves  will  guarantee,  and  which  every  credit  man 
verifies  before  he  accepts. 

Much  is  claimed  for  credit  insurance  as  a  stimulator 
of  confidence  in  trade  and  a  preventive  of  panics.  Since 
the  wide  expansion  of  credit  operations,  business  pros- 
perity has  doubtless  been  based  on  confidence  in  the 
financial  soundness  of  the  debtor  classes,  confidence  in 
the  return  of  money  for  goods  sold.  Confidence,  although 
more  intangible,  is  as  real  and  important  a  factor  in 
business  operations  as  the  banking  system  itself.  Any- 
thing, such  as  the  guaranteeing  of  an  account,  which  will 
give  to  confidence  a  tangible  basis,  and  will  do  away  with 
that  fecund  cause  of  panics  defined  by  the  term,  "the 
bottom  dropping  out,"  by  preserving  confidence  and 
hence  credit  between  seller  and  buyer,  and  will  thus 
keep  trade  stimulated,   is   to   be   commended   and    en- 


54 DEPARTMENT    ORGANIZATION 

couraged.  Not  only  this,  but  should  a  depression  come, 
it  is  claimed  its  worst  effect,  losses  through  outstanding 
accounts,  would  be  nullified  by  the  indemnification  of 
credit  insurance. 

Were  it  wholly  true,  as  an  admirer  recently  eulogized 
it,  *'that  credit  insurance  weaves  a  mesh  of  tough  fiber, 
confidence,  which  permeates  the  entire  crystallized  struc- 
ture of  our  commercial  body,  giving  greater  strength 
and  cohesion  to  withstand  a  strain,'*  then  it  might  un- 
qualifiedly be  called  a  public  institution  working  for  the 
public  good.  But  a  panic  is  what  the  name  signifies.  It 
would  be  just  as  easy  for  the  business  world  and  the  in- 
dividual creditor  to  lose  confidence  in  the  resources  of 
the  insurance  company  itself,  as  it  now  is  to  lose  con- 
fidence in  the  debtor,  and  the  resultant  crash  would  be 
infinitely  worse.  For,  since  credit  operations  would  be- 
come even  more  extended  under  a  credit  insurance 
regime,  the  liquidation  following  a  possible  loss  of  con- 
fidence would  be  correspondingly  greater.  Considering 
that  losses  from  bad  debts  in  the  last  decade  have  ap- 
proximated two  billion  dollars,  to  realize  such  an  ideal 
as  that  painted  in  the  statement  quoted  would  require  an 
institution  of  almost  incredible  capital,  power  and  pres- 
tige. 


^ 


TF  I  were  ashed  to  name  the  one  qualification  most  needed 
^  in  the  collection  department  I  should  unhesitatingly  say 
^'decision."  Indecision  in  the  credit  department  is  often 
dangerous y  while  in  the  collection  department  it  is  frequently 
■fatal  to  the  business. 

— Dorchester  Mapes 


WHEN  AND  HOW  TO  MAKE 
COLLECTIONS 

By  Harlow  N.  Higinbotham 

President.  The  National  Grocer  Company 

Formerly  Credit  Manager,  Marshall  Field  and  Company 

WHEN  the  credit  man  decides  that  the  time  has 
come  to  withdraw  credit,  from  a  customer,  he  is 
usually  confronted  with  the  difficult  problem  of  getting 
in  the  balance  due. 

In  extending  credits  and  in  making  collections  there 
are  few  established  rules  to  follow.  Experience,  sound 
judgment,  a  knowledge  of  human  nature — these  must 
take  the  place  of  rules.  Each  case  presents  its  individual 
problem.  The  settings  and  the  combination  of  circum- 
stances surrounding  it  may  be  wholly  different  from 
anything  the  credit  man  has  encountered  before.  Fre- 
quently a  special  campaign  is  necessary;  each  creditor 
must  be  approached  from  the  angle  most  likely  to  impel 
him  to  pay.  That  is  the  credit  man^s  most  important 
work — to  get  in  the  money,  especially  when  it  is  time  to 
close  the  risk. 

How  little  the  credit  man  can  rely  on  regular  methods, 
and  how  largely  he  must  depend  on  his  own  judgment  in 
getting  a  correct  line  on  a  suspected  customer,  was 
shown  in  my  experience  with  a  customer  who  owed  my 
firm  about  $5,000,  and  whose  increasing  slowness  in  tak- 
ing care  of  his  bills  led  to  the  suspicion  that  his  busi- 
ness was  not  prospering  as  it  should.  I  went  to  his  city, 
quietly,  and  did  some  reconnoitering.     Without  asking 


56  DEPARTMENT    ORGANIZATION 

direct  questions  or  disclosing  my  purpose,  I  talked  with 
various  persons  in  the  town.  All  the  information  was  in 
favor  of  our  doubtful  customer.  He  stood  high  in  the 
estimation  of  the  local  public,  especially  with  the  church 
people.  He  was  active  in  religious  affairs,  Sunday  school 
conventions,  and  the  like.  The  banks  regarded  him  as  a 
substantial  business  man. 

But  all  this  did  not  offset  the  fact  that  he  was  getting 
slow  in  his  payments,  nor  did  it  shake  my  conviction  that 
it  was  time  to  collect.  The  fact  that  he  was  so  active  in 
religious  affairs  strengthened  this  conviction.  Even  the 
church  may  be  a  diverting  influence  which  the  credit 
man  must  take  into  account,  for  when  a  merchant  be- 
comes extremely  active  in  church  work,  he  is  liable  to 
neglect  his  business.  If  he  is  independent  and  out  of 
debt,  this  is  his  own  affair,  but  when  some  one  else  is 
carrying  him,  it  is  different. 

HOW  an  opportunity  was  created  to  secure  valuable 
first-hand  information  concerning  the  exact  condi- 
tion and  prospects  of  a  customer's  business. 

In  the  basement  under  our  customer's  store  was  a 
barber  shop,  and  I  reasoned  that  here  would  be  a  good 
place  to  get  reliable  information  about  the  condition  of 
his  trade.  I  knew  that  the  noise  of  feet  and  the  handling 
of  goods  must  be  plainly  audible  below. 

So  I  took  occasion  to  be  shaved.  As  I  sat  in  the  chair, 
I  brought  the  conversation  around  to  the  subject,  in  a 
casual  way,  and  discovered  that  the  barber  had  a  well- 
defined  opinion  on  this  very  question. 

**I  reckon,''  he  said,  *'that  the  church  and  Sunday 
school  business  is  better  than  merchandising.  I  used  to 
hear  a  lot  of  tramping  upstairs,  and  a  lot  of  thumping 
of  goods  on  the  counters,  but  things  are  pretty  quiet  up 


COLLECTIONS  57 


there  these  days.    There  aren't  many  crowds." 

Here  was  confirmation  of  my  own  opinion.  The  pieces 
of  goods  were  not  being  thumped  down  from  the  shelves 
as  they  had  been  in  the  past.  The  merchant's  interests 
were  elsewhere  and  much  of  his  trade  was  also  elsewhere. 

I  went  back  home  and  wrote  this  customer  that  he 
must  pay  us  in  full.  He  came  to  see  us  at  once,  very 
indignant,  and  when  I  refused  to  give  him  further  time 
he  went  directly  to  the  head  of  our  company,  only  to  be 
promptly  referred  back  to  me  without  telling  him  the 
reasons.    I  firmly  insisted  upon  a  settlement. 

Within  a  day  or  two  I  received  a  call  from  the  mer- 
chant's local  banker. 

*'I  want  to  know  why  it  is,"  he  said,  with  a  show  of 
importance,  "that  you  refuse  credit  to  Mr.  Hilton.  He 
is  one  of  our  most  substantial  merchants.  Everybody  in 
our  town  has  the  utmost  confidence  in  him.  He  is  a 
leader  in  church  and  Sunday  school  affairs,  and  takes 
an  active  part  in  conventions  and  that  sort  of  thing.  If 
you  would  investigate  a  little,  you  would  reconsider  your 
attitude. ' ' 

I  did  not  tell  him  that  he  was  arguing  my  own  case — 
and  there  are  many  such  times  when  it  is  hard  for  a 
credit  man  to  keep  his  reasons  to  himself.  The  banker 
had  better  facilities  than  I  for  sizing  up  this  man;  he 
could  have  seen  that  his  business  was  on  the  decline  and 
that  the  merchant  himself  was  becoming  unduly  im- 
portant to  the  town  and  not  important  enough  to  his 
store.  But  the  banker  was  deceived  because  his  credit 
sense  was  not  keen. 

"I  am  glad  you  think  so  well  of  him."  I  said;  *' Un- 
doubtedly you  are  in  a  position  to  know.  But  we  need 
the  money.  We'll  have  to  ask  him  to  pay  his  account, 
and  no  doubt  he  can  raise  the  cash  at  home  without  any 


58 DEPARTMENT    ORGANIZATION 

hardship.  Your  own  bank,  I  presume,  would  let  him 
have  it. ' ' 

^*Yes,  it  will!*'  he  exclaimed.  **And  it's  absurd  that 
a  house  like  yours  makes  such  a  thing  necessary.'* 

So  he  went  back  home  and  loaned  Mr.  Hilton  $5,000 
with  which  our  bill  was  paid.  But  before  Hilton  paid 
the  loan  he  failed.  The  banker  could  not  interpret  the 
handwriting  on  the  wall;  he  made  the  common  mistake 
of  confusing  good  fellowship  and  good  pay. 

This  incident  illustrates  the  desirability  of  obtaining 
information  quietly,  of  analyzing  it,  and  of  keeping  it 
to  yourself. 

The  credit  man  should  draw  an  imaginary  circle  about 
each  customer.  A  circle  may  be  only  a  mile  in  circum- 
ference, or  it  may  be  several  hundred  miles,  but  it  repre- 
sents the  sphere  of  the  customer's  activities.  Everything 
within  that  circle  having  any  bearing  on  a  customer's 
business,  should  be  recorded  on  the  credit  man's  cards  or 
in  his  brain.  No  limited  range  of  information  will 
suffice,  for  it  is  only  by  knowing  all  about  a  man  that 
you  can  judge  him  accurately.  I  knew  many  of  my  cus- 
tomers intimately;  not  only  their  business  affairs,  but 
how  many  children  they  had,  how  many  times  they  had 
been  married,  what  their  diversions  were,  what  place 
they  held  in  the  church,  may  many  horses  they  kept. 
All  these  things  are  credit  assets  or  liabilities,  and  the 
sum  of  them  tells  the  credit  man  when  to  draw  the  line 
and  collect  the  balance  due.  Often  I  secured  this  in- 
formation by  personal  visits  to  the  towns  where  doubtful 
customers  were  located.  And  often  mere  straws  told 
me  which  way  the  wind  was  blowing. 

Once  I  went  to  a  town  where  a  merchant  owed  us 
$1,000.  A  brief  observation  of  his  business  convinced  me 
that  his  trade  was  falling  off  and  his  enterprise  waning. 


COLLECTIONS  59 


I  felt  certain  that  he  could  not  keep  his  head  above  water 
very  long,  although  nobody  told  me  so  and  I  asked  no 
direct  questions.  I  knew  that  if  I  gave  the  alarm  we 
would  lose  our  money,  so  I  merely  said  to  him,  "Jones, 
we  need  the  cash  but  we  don't  want  to  embarrass  you. 
We  are  not  going  to  draw  on  you  for  any  large  amount 
at  one  time,  but  we  are  going  to  draw  as  often  as  we 
think  you  can  pay  a  fifty-dollar  draft. ' ' 

I  went  home  and  got  out  the  first  draft,  which  was» 
paid.  In  a  few  days  I  drew  again.  Jones  dug  down  into 
his  cash  drawer  once  more.  He  did  not  want  to  refuse 
so  small  a  draft.  In  this  way  I  kept  working  the  in- 
debtedness down,  and  Jones,  expecting  the  little  drafts, 
was  bending  all  his  energies  to  raise  money  enough  to 
meet  them.  Meanwhile,  he  was  buying  from  hand  to 
mouth  of  other  wholesalers  who  had  not  yet  sized  up  his 
affairs.  He  probably  reasoned  that  the  promptness  with 
which  he  met  our  drafts  gave  him  standing  at  the  bank — 
the  confidence  of  a  banker  is  usually  the  first  concern 
with  a  merchant  whose  credit  is  getting  shaky. 

Luck  was  with  me  and  he  lasted  just  long  enough  to 
clean  up  the  final  fifty-dollar  draft. 

SHREWDNESS  in  sizing  up  an  account  depends  upon 
close  familiarity  vnth  trade  conditions  ^  the  faculty  for 
discovering  evidence  of  declining  business. 

To  the  layman  a  credit  man's  tact  and  shrewdness  in 
sizing  up  actual  conditions  would  seem  to  be  largely 
intuition,  but  in  reality  it  is  a  finely  developed  capacity 
for  observing  and  interpreting  the  signs.  To  sense  the 
actual  condition  of  a  business,  the  evidence  of  develop- 
ment or  retrogression,  requires  more  than  second-hand 
information.  Elaborate  reports  based  on  the  opinions  of 
men  who  are  closely  associated  with  a  merchant  are  quite 


60 DEPARTMENT    ORGANIZATION 

likely  to  be  inadequate.  Those  who  see  and  know  the 
doubtful  risk  at  short  range  are  easily  influenced  by  per- 
sonal appearances.  The  credit  man  should  not  be  guided 
by  reports,  against  his  own  convictions.  Of  course,  he 
cannot  visit  all  his  customers  personally,  but  he  can 
gather  a  mass  of  information  about  them  that  does  not 
come  in  the  regular  channels.  First,  he  should  know  the 
detailed  resources  of  the  town  in  which  a  customer  is  lo- 
cated, and  the  country  surrounding  that  town.  He 
should  know  the  population  and  the  different  classes  of 
people;  he  should  know  what  competition  his  customer 
has,  and  so  forth.  Among  these  things  the  previous  his- 
tory of  his  customer  is  very  important,  for  if  he  has 
moved  to  the  town  from  some  other  state  or  locality,  he 
may  be  a  misfit. 

I  recall  an  instance  where  a  merchant  was  out  of  his 
element.  He  had  gone  from  Michigan  to  a  state  farther 
west.  His  ideas  were  not  in  harmony  with  his  new  field 
of  activity.  He  thought  himself  too  big  a  man;  he  was 
altogether  too  pompous  and  important.  Especially  from 
this,  as  well  as  other  things  I  learned  about  him  in  his 
new  home,  I  decided  that  he  would  make  a  failure  of 
his  business.  I  asked  him  to  settle  his  account,  and  he 
came  to  Chicago;  he  walked  past  my  desk  with  a 
haughty  air,  and  went  to  an  authority  he  thought  higher. 
But  he  discovered  that  I  was  the  credit  man,  and  I  got  a 
settlement  out  of  him  before  he  went  under. 

Luck  sometimes  plays  a  part  in  collecting  doubtful 
accounts,  but  what  most  people  call  luck  is  more  often  a 
shrewd  insight  into  things.  I  remember  a  customer  in 
Michigan  whose  account  with  us  had  reached  $5,000.  He 
was  getting  slow,  and  I  went  to  his  town  to  see  what  the 
trouble  was.  I  found  that  his  business  was  in  bad  shape 
and  that  our  account  apparently  stood  a  slim  chance. 


COLLECTIONS  61 


The  only  clear  property  he  had  consisted  of  a  tract  of 
timber  land  in  the  northern  part  of  the  state.  This 
was  in  the  early  days  when  lumber  was  almost  a  drug  on 
the  market  and  nobody  realized  the  prospective  value 
of  such  lands.  Perhaps  I  did  not  fully  realize  it  myself, 
but  I  had  lived  in  the  district  where  the  land  was  located, 
and  had  formed  my  opinion  as  to  its  future.  I  offered 
to  take  the  tract  and  cancel  the  debt. 

To  all  appearances,  the  merchant  was  getting  much 
the  better  of  the  transaction,  and  he  was  glad  to  avail 
himself  of  the  opportunity  to  get  out  from  under  his 
load  so  easily. 

I  held  this  tract  in  my  own  name  for  ten  or  twelve 
years,  when  we  sold  the  wood  on  it  for  $90,000.  I  looked 
up  our  old  customer  and  found  him  infirm  and  in  poor 
circumstances,  so  I  gave  him  five  thousand  dollars  in 
cash.  Then  he  turned  around  and  sued  us  for  the 
balance,  but,  of  course,  he  lost  his  case;  for  no  doubt 
this  property  would  have  been  divided  among  his 
creditors  at  the  time  of  his  failure  for  much  less  than  we 
gave  him  for  it. 

This  incident  merely  illustrates  the  fact  that  a  credit 
man  must  be  more  than  a  clerk  or  employee;  he  must 
have  his  business  sense  acutely  developed,  and  his  knowl- 
edge of  affairs  and  values  must  cover  a  wide  field,  for 
not  every  settlement  leads  directly  to  the  cash  drawer. 

INSTANCES  that  show  hjw  the  credit  man^s  alert- 
ness   and    quick    action    at    the    critical    moment 
p  evented  bad  accounts  from   becoming   total   losses. 

It  was  a  little  piece  of  collection  work  that  first  es- 
tablished me  firmly  as  a  credit  man.  A  certain  mer- 
chant in  a  small  city  owed  us  $650  that  we  seemed  un- 
able to  collect.     The  man  in  charge  of  credits  at  that 


62 DEPARTMENT    ORGANIZATION 

time  sent  me  to  see  what  the  trouble  was.  I  had  no 
definite  instructions,  but  I  was  on  my  mettle  and  was 
determined  to  do  the  best  I  could.  First,  I  spent  some 
time  walking  about  the  town  and  sizing  it  up.  I  went 
into  all  the  stores,  noted  the  trade  they  were  doing,  and 
made  an  excuse  to  talk  to  the  merchants  without  letting 
them  know  my  business.  Then  I  went  to  the  banks  and 
introduced  myself,  merely  saying  that  I  was  on  a  col- 
lection tour  for  my  house,  and  asked  commonplace 
questions  about  the  different  merchants.  I  laid  no  em- 
phasis on  the  particular  retailer  I  had  in  mind,  but  I 
learned  that  the  bankers  considered  him  good  and  were 
willing  to  discount  his  notes. 

I  was  convinced,  however,  that  the  dealer  in  question 
was  not  solvent,  or,  at  least,  was  not  doing  the  business 
to  justify  our  line  of  credit  with  him.  I  did  not  like  the 
appearance  of  his  store  nor  the  way  he  was  handling 
things.  I  went  to  him  and  told  him  we  must  have  our 
money.  He  said  he  could  not  pay — which  I  knew  per- 
fectly well.  Then  I  drew  up  three  notes,  at  thirty,  sixty 
and  ninety  days  respectively,  and  he  signed  them.  These 
I  took  to  one  of  the  banks,  indorsed  them  without  re- 
course, and  discounted  them.  So  well  did  the  merchant 
stand  in  the  banker's  opinion  that  he  accepted  the  in- 
dorsement without  complaint  when  I  made  it  plain  to 
him  that  he  was  buying  his  fellow-townsman's  paper,, 
not  that  of  my  own  firm. 

I  took  the  money  back  to  Chicago  with  me,  and  it  was 
not  long  afterward  that  I  heard  of  the  merchant's  fail- 
ure. 

This  instance  shows  the  necessity  of  looking  at  credits 
from  a  broad  standpoint.  The  viewpoint  of  the  local 
bankers  was  at  close  range ;  they  judged  the  man 's  risk 
without  any  analysis  based  on  facts. 


COLLECTIONS  63 


In  another  ca^e,  I  was  confronted  with  the  collection 
of  forty-five  hundred  dollars.  This  merchant  owed 
another  wholesaler  more  than  us.  I  found  when  I  ar- 
rived in  the  town  that  a  man  from  the  other  house  had 
made  an  effort  to  get  money,  but  had  contented  himself 
chiefly  with  promises. 

After. analyzing  this  man^s  business  and  especially  the 
methods  under  which  he  was  operating;  I  made  up  my 
mind  that  the  time  had  come  to  collect,  if  we  hoped  to 
do  so  at  all.  I  told  him  we  must  have  a  settlement.  He 
said  it  was  impossible — that  the  people  who  owed  him 
would  not  pay,  and  he  must  have  more  time. 

Then  I  offered  to  show  him  how  to  get  money.  "Ill 
stay  with  you,'*  I  said,  '* until  some  of  these  people  do 
pay." 

He  was  glad  to  have  my  help.  I  went  into  his  store 
and  made  myself  a  part  of  it,  got  acquainted  with  some 
of  his  biggest  debtors,  and  induced  them  to  give  him 
their  notes.  I  went  out  in  the  country  and  hunted  up 
other  debtors,  taking  their  notes  also.  Under  his  au- 
thority, I  collected  each  wherever  I  could.  Nobody  in 
the  town,  except  the  dealer  himself,  knew  whom  I  really 
represented.  Among  other  things  I  did  was  to  find  a 
buyer  for  a  stock  scales  and  yard  attached,  belonging  to 
my  debtor.  I  had  observed  that  it  was  a  poor  venture, 
for  while  it  returned  ostensible  dividends,  it  consumed 
a  large  share  of  this  man's  time  and  attention.  For  this 
I  secured  $1,500.  He  was  quite  willing  to  sell  the  prop- 
erty when  I  made  it  plain  to  him  what  its  possession 
really  meant  to  his  business. 

I  stayed  a  week  with  him,  and  when  I  left  I  had  col- 
lected almost  enough,  in  cash  and  notes,  to  settle  the  ac- 
count. To  make  up  the  balance,  I  persuaded  him  to 
return  certain  goods. 


I 


64 DEPARTMENT    ORGANIZATION 

This  merchant,  like  the  others  I  have  mentioned,  failed 
within  a  short  period. 

These  instances  illustrate  the  necessity  of  the  credit 
man  to  be  continually  on  the  alert,  to  watch  and  analyse 
the  movements  of  customers  with  past  due  accounts,  to 
know  the  important  details  of  their  business  and  private 
life,  to  rely  upon  personal  observation  to  size  up  the  ex- 
tent of  safety  or  danger.  It  is  only  through  a  close 
personal  knowledge  of  the  customer's  affairs  that  the 
credit  man  is  able  to  detect  the  signs  of  declining  busi- 
ness and  to  collect  the  balance  due  before  the  sheriff 
steps  in. 


^ 


TT  MIGHT  be  supposed  thai  through  the  improved  methods 
"*■  of  credit  making,  the  credit  man  has  become  hard  and 
distrustful,  but  this  is  not  a  true  inference.  Credit  is  dis- 
pensed today  as  liberally  as  ever,  but  it  is  a  more  intelligent 
dispensation.  By  cutting  off  the  unworthy  from  credit, 
the  credit  man  is  in  position  to  extend  it  to  the  worthy  more 
than  ever  before.  The  curtailment  applies  to  those  who  are 
not  entitled  to  credit,  and  it  is  from  this  source  that  is  esti- 
mated the  decrease  in  losses. 

— Peter  R.  Earling 

Chairman.  World's  Congress  on  Crediu  and  Collections 


PART  II-CREDIT 
POLICIES 


Credit — and  Character 

A  LL  the  stocks  and  bonds  dealt  in  on  all  the 
stock  exchanges  of  the  world,  all  the  huge 
national  debts  and  state  debts  in  the  world,  all 
the  tremendous  international  trade  balances  one 
way  or  another,  all  the  bills  and  accounts  receiv- 
able on  all  the  ledgers  of  the  world,  and  very 
nearly  all  of  what  is  called  money  in  the  world 
are  only  different  forms  and  expressions  of  this 
wonderful  thing  named  "Credit". 

Credit  starts  enterprises,  moves  wheels,  builds 
railroads,  wages  wars,  makes  civilization.  The 
modern  business  world  lives,  moves  and  has  its 
being  in  credit. 

The  word  credit  comes  from  credo  (I  believe), 
and  every  transaction  performed  by  credit  in- 
volves the  belief  on  the  part  of  one  man  in  the 
integrity  and  character  of  another  man. 

Character  lies  at  the  very  foundation  of  modern 
business  and  no  business  can  long  endure  that  is 
not  built  on  that  foundation. 


DAVID  R.  FORGAN 

President,  National  City  Bank  of  Chicago 
Vice-President,  Chicago  Clearing  House  Association 


VI 


WHOLESALE  CREDITS  AND 
COLLECTIONS 

By  Howard  R.  Huse 

IN  extending  credit  in  a  wholesale  house,  character, 
estimated  worth,  volume  of  business  and  expenses, 
are  the  conditions  taken  as  the  basis  for  accommodation. 
If  a  man  is  lacking  in  any  of  these,  experience  only  will 
indicate  to  what  extent  his  account  is  desirable. 

In  getting  the  information  necessary  to  determine 
whether  or  not  credit  should  be  extended,  the  credit  man 
has  four  principal  sources  open  to  him.  These  are, 
agency  reports,  exchange  trade  information,  local  re- 
ports and  information  from  salesmen.  The  systematic 
and  satisfactory  way  of  making  credits  is  to  combine  the 
information  from  all  these  sources. 

The  use  of  mercantile  reporting  agencies  offers  one 
of  the  best  means  to  secure  information.  Local  at- 
torneys and  banks,  if  they  are  treated  fairly,  can  usually 
give  good  first-hand  knowledge.  Their  information,  how- 
ever,  must  be  carefully  analyzed  and  should  generally 
be  discounted.  Their  reports  are  written  from  a  local 
point  of  view  which  is  often  partial  either  toward  friend- 
liness or  hostility. 

Besides  these  sources  of  credit  knowledge,  the  sales- 
man otiers  a  unique  opportunity  for  getting  first-hand 
information.  As  he  is  in  actual  contact  with  customers, 
he  can  find  out  their  standing  in  the  community,  how 


68  THE    CREDITOR'S    POLICY 


they  are  looked  upon  financially  and  socially,  what  their 
reputation  for  character  and  integrity  is — he  can  observe 
the  customer's  method  of  managing  his  business,  the 
character  of  his  patronage  and  the  amount  of  his  stock; 
he  can  determine  whether  or  not  the  customer  is  over- 
buying and  can  advise  against  it. 

In  order  to  secure  this  information  from  the  salesman, 
the  wholesale  house  credit  man  should,  as  far  as  possible, 
let  the  salesman  know  the  policy  he  is  pursuing,  his 
methods  and  purposes.  He  should  teach  the  salesman 
what  kind  of  information  he  wants  and  why  he  wants  it, 
what  credit  information  consists  of  and  how  a  man  is  to 
be  approached  in  order  to  get  it.  Furthermore,  he 
should  make  clear  the  fact  that  it  is  a  part  of  a  sales- 
man's duty  to  express  his  opinion  of  the  risk  on  each 
order  he  gives.  Thus,  if  the  salesman  is  given  to  under- 
stand and  knows  by  experience  that  his  judgment  is  to 
be  a  determining  factor,  he  will  take  pride  in  making  it 
reliable.  It  flatters  the  salesman  to  know  that  his  opin- 
ion is  of  some  weight.  The  fact  should  be  impressed 
upon  him  that  this  is  a  part  of  his  work,  that  the  sale 
is  not  complete  until  he  has  expressed  his  judgment  of 
the  risk. 

Extension  of  unwise  credit  to  applicants  with  bad  or 
unfavorable  records  can  be  avoided  by  using  ordinary 
care  and  industry  in  getting  information.  Credits  ex- 
tended to  this  class  of  customers  are  past  rectifying  and 
inexcusable.  Sagacity  is  not  needed  in  passing  on  cus- 
tomers with  bad  records  nor  on  customers  who  have  very 
high  ratings,  but  between  the  two  extremes  of  good  and 
bad  are  ninety-eight  out  of  every  hundred  cases  which 
come  before  the  credit  man.  These  cannot  be  classed 
among  the  discreditable  nor  yet  among  the  unquestion- 
ably good.    A^  a  matter  of  fact,  the  great  majority  of 


WHOLESALE    CREDITS 


men  to  whom  the  wholesale  house  sells  have  for  their 
principal  capital  only  experience,  energy  and  more  or 
less  capital.  Their  success  is  contingent  on  times  and 
circumstances  which  they  cannot  altogether  control  and 
the  creditor  fs  obliged,  therefore,  to  take  a  joint  risk 
with  them. 

LIBERALITY  in  granting  credit  is  hosed  upon  the 
fact  that  most  business  men  are  honest  and  is  essen- 
tial to  the  growth  and  popularity  of  any  business. 

In  dealing  with  these  cases,  there  is  a  fundamental 
principle  by  which  the  credit  man  should  be  governed. 
Except  for  the  few  notoriously  bad  and  dishonest  busi- 
ness men,  he  should  assume  that  his  customers  will  pay 
if  they  can,  even  though  as  an  abstract  proposition  they 
may  have  no  definite  notion  of  honesty  or  commercial 
honor.  Every  man  nominally  must  make  a  living  for 
himself  and  his  family.  He  selects  this  or  that  busi- 
ness as  being  best  suited  to  his  circumstances  and  ex- 
perience. He  invests  what  little  money  he  has  saved  in 
it.  The  success  of  his  business  is  everything  to  him. 
He  understands  it  better  than  he  does  anything  else  and 
the  work  is  easier  for  him  than  any  other.  He  has 
learned  and  knows  that  he  can  continue  this  business 
on  one  condition  only — that  he  pay  his  creditors  and 
with  reasonable  promptness.  Honesty  and  good  com- 
mercial usages  commend  themselves  to  him  as  being 
necessary,  or  in  other  words,  he  realizes  that  honesty  is 
for  him  the  best  policy.  Business  men  with  rare  excep- 
tions follow  this  line  of  reasoning. 

A  liberal  policy  in  credit  making  is  necessary  for  the 
growth  and  popularity  of  the  house.  To  be  popular  is 
next  to  being  successful.  The  most  successful  houses 
are  the  most  popular  the  world,  over  an<3  vice  versa.    The 


70 THE    CREDITOR'S    POLICY 

wholesale  house  credit  man  should  endeavor  to  gain 
popularity  for  his  firm  and  a  name  for  liberal  treat- 
ment. 

A  new  account  open,  the  credit  man  has  not  disposed 
of  his  subject.  Not  merely  a  first  order,  but  every  suc- 
ceeding order  requires  careful  investigation  and  consider- 
ation. The  difference  is  that  while  investigation  on  a 
first  order  must  be  done  at  one  time,  specifically,  succeed- 
ing orders  must  be  watched  carefully  and  judgments 
based  upon  previous  experience  with  the  customer. 

The  frequency  with  which  special  reports  should  be 
obtained  depends  upon  the  customer's  line  of  credit  and 
the  conditions  of  his  account,  but  all  information  should 
be  revised  at  least  once  a  year  and  oftener  when  the 
risk  is  more  than  ordinary  or  when  an  increase  of  credit 
or  an  extension  is  asked. 

The  interchange  of  knowledge  and  ideas  necessary 
between  the  collection  and  credit  departments  in  any 
house  makes  them  almost  inseparable.  In  order  to  make 
credits  safely,  a  credit  man  must  have  the  knowledge 
which  comes  from  an  oversight  of  collections.  To  make 
collections  intelligently  the  collection  manager  must 
possess  the  information  and  experience  acquired  in  mak- 
ing credits.  Injustice  to  customers  and  losses  to  the 
house  would  arise  were  the  two  departments  kept  en- 
tirely separate.  The  continuance  of  credit  to  a  customer 
depends  not  only  upon  his  responsibility,  but  upon  the 
manner  in  which  his  account  is  cared  for.  If  the  credit 
man  has  his  finger  on  collections,  he  can  make  credits  in 
less  time  and  more  accurately,  and  the  collection  man- 
ager fresh  from  the  making  of  credits  can  conduct  the 
collections  with  less  expense  and  less  friction. 

Delinquent  customers  are  divided  into  several  classes, 
careless,  chronically  slow,  temporarily  hard-up  and  in- 


WHOLESALE    CREDITS 71 

solvent.  To  decide  which  classification  fits  any  indi- 
vidual is  one  of  the  most  difficult  problems  of  the  credit 
man  since  the  classification  determines  the  method  to  be 
used  in  collecting  the  account.  The  strictly  correct  so- 
lution in  dealing  with  overdue  accounts  would  be  to  ig- 
nore possible  conditions  altogether  and  to  take  peremp- 
tory steps  to  get  the  money,  but  there  are  two  protests 
against  this  procedure.  In  the  first  place,  it  is  contrary 
to  policy  to  drive  away  a  customer  who  may  be  solvent 
by  too  rigorous  methods,  and  in  the  second  place,  this 
method  is  expensive.  Furthermore,  to  enforce  collectious 
at  this  uncertain  stage  might  be  an  injiLstice  to  the 
debtor.  So  long  as  the  credit  man  can  assume  that  the 
customer  is  good  for  eventual  payment,  the  best  policy 
is  to  use  the  coaxing  process.  At  least,  while  there  are 
extenuating  circumstances,  the  credit  man  is  forced  to 
forbearance  and  leniency  from  any  standpoint  from 
which  he  may  look  at  the  case. 

THE  course  to  pursue  in  making  collections;  secur- 
ing information  concerning  the   debtor^s   business; 
how  to  educate  customers  into  prompt  payment. 

The  first  thing  to  do  when  an  account  is  past  due  and 
demand  for  payment  has  been  refused,  is  to  get  all  the 
information  possible  concerning  the  debtor.  The  col- 
lector should  look  up  the  report  on  file  or  have  reports 
procured.  This  will  give  him  an  idea  of  the  debtor's 
capital,  resources,  and  other  details,  and  is  a  help  to  him 
in  handling  the  case. 

When  an  account  becomes  past  due  and  remains  un- 
paid after  proper  efforts  have  been  made  to  collect,  the 
collector  has  an  acknowledged  right  to  ask  for  and  de- 
mand information  concerning  the  debtor's  business. 
Under  these  circumstances  the  debtor  cannot  refuse  the 


72 THE    CREDITOR'S    POLICY 

demand  with  justice,  and  if  he  does  so,  his  action  is 
open  to  suspicion  at  once.  This  information  should  be 
comprehensive  and  should  state  what  the  assets  are  com- 
posed of.  A  statement  of  liabilities  is  also  essential.  A 
knowledge  of  these  facts  and  of  the  general  character  of 
the  debtor  himself  places  the  collector  in  a  position  to 
determine  intelligently  whether  it  is  safe  to  extend  fur- 
ther time. 

The  most  important  thing  is  not  to  collect  money  after 
it  is  due,  but  to  educate  customers  to  pay  bills  when  they 
mature.  A  bill  should,  of  course,  be  sent  out  with  each 
shipment.  It  is  well  to  send  statements  on  the  first  of 
each  month  to  all  houses  whose  accounts  bear  a  great 
variety  of  charges  each  month,  and  who  discount  their 
bills.  If  bills  are  not  paid  before  maturity,  there  is  no 
better  way  of  educating  customers  than  by  rendering 
statements  on  the  very  day  their  bills  matur6,  notifying 
them  of  the  fact,  and  stating  that  unless  they  remit,  or 
ask  some  other  form  of  settlement,  draft  will  be  made 
upon  them  within  a  certain  definite  time.  The  practice 
of  sending  out  statements  on  the  first  and  fifteenth  of 
each  month  for  accounts  which  are  to  mature  during  the 
next  fifteen  days  destroys  the  chief  value  of  a  statement, 
which  is  to  bring  to  the  attention  of  the  debtor  the  fact 
that  his  bill  is  due  now  and  that  remittance  is  expected. 
The  best  day  on  which  to  remind  a  man  of  this  fact  is 
the  very  day  on  which  his  account  matures. 

The  notification  that  a  sight  draft  will  be  made  on 
debtor  if  his  account  is  not  paid  will  give  no  offense  if 
accompanied  by  the  saving  statement,  **  unless  other 
form  of  payment  is  desired. ' '  This  gives  the  debtor  the 
opportunity  of  sending  his  check  in  payment,  or  asking 
for  an  extension  or  some  other  settlement  than  a  sight 
draft.    If,  however,  neither  payment  nor  explanation  of 


WHOLESALE    CREDITS 73 

any  kind  is  received,  the  credit  man  should  always  draw 
the  sight  draft  on  the  day  fixed.  It  is  not  good  business 
policy  to  tamper  with  a  customer's  feelings.  Do  what 
you  say  you  will  do.  Let  him  know  and  comprehend 
the  policy  and  methods  of  the  house  by  inference  from 
their  constant  and  regular  operation.  On  the  other 
hand,  if  a  customer  complains  that  he  does  not  like  that 
manner  of  settlement,  the  credit  man  should  never  let  a 
complaint  pass,  but  should  always  notify  the  customer 
that  he  will  be  glad  to  adopt  any  reasonable  method 
of  settlement  suggested,  and  then  demand  that  the  cus- 
tomer live  up  to  his  own  proposition. 

If  consistently  followed,  this  method  of  drawing  sight 
drafts  is  not  offensive  to  customers,  especially  the  coun- 
try trade.  Many  of  these  do  not  keep  ledger  accounts 
with  their  creditors.  They  depend  solely  upon  the  bills 
and  statements  which  they  receive.  They  check  up  the 
goods  when  received  with  the  original  bill,  and  stick  it 
on  a  spindle.  When  the  statement  comes,  they  check  it 
up  with  the  bill,  and  either  remit  at  once  or  prepare  to 
honor  the  draft.  This  makes  a  very  simple  method  of 
bookkeeping  for  them  and  obviates  the  necessity  for 
keeping  an  account.  The  original  bill  is  their  book  ac- 
count, the  statement  is  their  reminder,  and  their  own 
check  or  the  draft  returned  to  them  by  their  bank  is 
their  voucher  receipt. 

If  a  sight  draft  is  not  paid  when  presented  by  a  local 
bank,  the  draft  may  in  some  cases  be  presented  again; 
and  if  then  refused,  the  customer  should  be  asked  for  an 
explanation.  By  using  the  ledger  system  described,  the 
dates  of  these  operations  and  comments  can  be  noted 
by  the  bookkeeper,  so  that  the  transactions  can  be  fol- 
lowed systematically  and  a  record  preserved. 

The  course  of  action  to  be  pursued  after  the  second 


74 THE    CREDITOR'S    POLICY 

refusal  to  honor  the  draft  depends  upon  the  value  of 
the  account,  the  credit  man's  experience  with  the  cus- 
tomer, and  his  financial  condition.  It  is  at  this  stage  that 
heart  to  heart  letters  are  very  telling.  Nothing  appeals 
to  a  man  like  presenting  a  case  to  him  plainly  and  truth- 
fully, in  an  open,  fair  way.  "Why,"  the  credit  man 
may  ask  him.  '*  cannot  this  house  demand  the  same 
promptness  in  payments  from  a  customer  as  the  latter 
demands  from  the  house  in  filling  his  orders  ? "  A  busi- 
ness man  likes  to  be  fair,  and  if  it  is  proved  to  him  that 
he  is  being  treated  fairly  and  that  he  is  asked  merely  to 
do  the  right  thing  in  return,  it  is  rare  that  he  will  not 
respond. 

Nothing  is  more  fatal  than  to  allow  overdue  collec- 
tions to  drag  along.  When  a  customer  has  not  asked  for 
an  extension,  nothing  should  be  taken  for  granted  by 
the  creditor.  The  burden  of  asking  favors  should  be  put 
on  the  debtor,  especially  when  the  creditor  has  done  his 
part. 

A  collector  can,  on  the  one  hand,  be  over-sanguine  and 
easy  and,  on  the  other,  too  suspicious.  He  should  always 
keep  this  question  in  mind :  Is  the  account  in  jeopardy  ? 
If  he  thinks  there  is  any  danger,  he  should  place  the 
account  in  such  condition  that  if  anything  happens  it 
will  be  safeguarded.  If  a  credit  man  grants  a  favor  by 
extending)  time  for  payment  on  an  account,  he  is  privi- 
leged to  ask  for  something  in  return ;  that  is,  he  may  ask 
for  some  surety  or  guarantee  on  the  account.  If  such 
a  proposition  is  tactfully  put  to  a  customer,  it  will  gen- 
erally win  his  assent.  In  such  instance,  it  is  always 
better  to  see  a  customer  personally.  What  can  be  said 
can  often  not  be  written.  The  friendly  expression  of  a 
man's  face,  the  explanation  of  his  attitude  by  word  of 
mouth,  an  air  of  fairness  and  sympathy — things  which 


WHOLESALE    CREDITS  75 


cannot  easily  be  put  into  a  letter — will  place  what  may 
seem  like  a  hard  proposition  in  a  good  light.  If  a  per- 
sonal interview  is  not  possible,  it  must,  of  course,  be  left 
to  correspondence.  The  essential  thing,  then,  isi  to  leave 
no  loopholes  in  a  letter  which  will  allow  the  debtor  to 
prolong  the  matter.  State  your  proposition  and  then  put 
a  clause  on  tfie  end  of  it  which  will  allow  of  no  if 's  and 
and's.  "When  a  man  feels  such  a  tone  in  a  letter, 
friendly,  yet  final,  he  will  come  to  terms  quickly. 

LEGAL  action  to  collect  should  he  avoided  until  'peace- 
ful  methods  have  been  exhausted — often  it  is  better 
to  compromise  than  to  try  to  force  payment. 

When  peaceful  methods  have  been  exhausted,  only  one 
recourse  remains — the  law.  Legal  action  is  unpleasant 
and  unfruitful,  and  the  credit  man  should  avoid  it  as 
long  as  possible.  When  he  has  decided  that  this  is  the 
only  alternative,  however,  he  should  not  quibble  farther 
with  the  debtor,  but  carry  out  his  intention. 

For  a  concern  with  a  large  business,  the  best  plan  ia 
that  it  have  its  own  general  attorney.  He  knows  the 
house,  is  familiar  with  its  business  and  policy;  he  is  a 
part  of  it.  He  can  handle  a  case  in  a  way  that  a  foreign 
attorney  cannot;  he  will  be  much  more  determined  to 
further  the  interests  of  the  house,  for  he  is  working,  not 
for  himself,  as  is  a  foreign  attorney,  but  for  the  house. 
He  will  also  have  a  better  knowledge  of  the  case  in  ques- 
tion and  of  the  customer  himself,  for  as  house  attorney 
much  work  will  come  his  way  aside  from  the  legal  collec- 
tions, which  will  make  him  familiar  with  customers.  He 
can  save  his  salary  in  commissions  paid  to  a  foreign  at- 
torney, and  do  much  other  work  besides.  Chronically 
slow  cases,  instead  of  being  placed  in  the  hands  of  a 
collection  agency,  can  be  placed  in  the  hands  of  the 


76 THE    CREDITOR'S    POLICY 

house  attorney  to  be  handled  at  his  own  discretion. 

It  is  desirable  the  attorney  use  stationery  of  his  own, 
such  as  will  not  make  it  generally  known  that  he  is 
house  attorney,  for  an  unfavorable  impression  may  ob- 
tain rmong  customers  where  it  is  known  a  legal  depart- 
ment is  required.  It  is  preferable  to  call  him  an  ad- 
juster. In  fact,  if  he  is  the  right  kind  of  a  man,  he  will 
turn  out  to  be  much  more  of  an  adjuster  than  an  at- 
torney, and  for  this  additional  reason  he  will  be  of  great 
value  to  a  house. 

A  well  organized  collection  department  should  be  able 
to  carry  an  account  up  to  the  point  where  it  is  turned 
over  to  the  attorney  for  immediate  suit.  The  services 
of  a  collection  agency  between  the  stage  where  the  col- 
lection of  the  account  becomes  doubtful  and  the  stage 
where  it  is  placed  in  the  hands  of  an  attorney  should 
not  be  necessary.  The  collection  agencies  are,  however, 
a  great  help  to  a  small  house  which  has  neither  the  time 
nor  the  organization  to  put  the  proper  effect  and  ex- 
pert services  into  collections. 

As  a  general  proposition,  an  honest  debt  is  not  open 
to  compromise,  but  this  is  a  statement  which  has  a  great 
many  exceptions  and  is  subject  to  many  extenuating 
circumstances.  If  a  debtor  appears  to  have  done  his  best 
and  has  made  what  is  called  an  ''honest  failure,"  it  can- 
not be  other  than  the  duty  of  the  credit  man  to  his  firm 
to  make  the  best  settlement  possible.  In  the  case  of  a 
compromise,  however,  there  should  be  a  definite  under- 
standing with  the  other  parties  and  with  the  debtor  that 
all  parties  shall  share  alike.  It  is  in  just  such  matters 
that  a  credit  man,  if  he  is  a  good  financier  and  a  busi- 
ness man,  will  help  to  administer  affairs  of  the  debtor 
in  such  a  way  that  he  may  be  able  to  pull  out  of  a  bad 
hole.     Generally  speaking,  compromises  should  be  dis- 


WHOLESALE    CREDITS 77 

couraged.  If  investigation  shows  that  the  case  is  one  of 
fraud  or  cowardice,  rather  than  countenance  such  pro- 
ceedings, creditors  should  combine  to  insure  the  full 
operation  of  the  law. 


^ 


WHO  is  the  best  credit  man?  We  cannot  consider  the 
credit  man  per  se  at  all.  We  must  consider  him  as 
the  head  of  one  of  many  departments  of  a  business,  and  his 
department  must  work  out  that  policy  which  is  best  adapted 
to  the  business  as  a  whole  and  which  will  bring  the  best 
general  results.  An  identical  credit  and  collection  policy 
for  all  lines  of  business  and  all  houses  would  not  do.  The 
choice  of  the  proper  policy  is  really  a  matter  requiring  careful 
study  y  and  depends  on  all  the  varied  factors  which  go  to  make 
up  a  business  and  its  environment.  But  whatever  the  nature 
of  the  business,  that  credit  man  is  the  best  who  will  approve 
the  largest  percentage  of  orders  and  still  keep  his  percentage 
of  loss  down  to  a  fair  average.  One  credit  man  might  refuse 
half  the  orders  which  came  to  his  house,  while  another  would 
accept  ninety  per  cent  of  them,  and  both  show  the  same  per- 
centage of  loss.  The  ninety  per  cent  credit  manager  would 
certainly  be  the  more  valuable  man  of  the  two, 

— Peter  R.  Earling 

Gbalrman,  World's  Congress  on  Credits  and  Collections 


VII 

CREDIT  PROBLEMS  OF  THE 
MANUFACTURER 

By  Berthold  E.  Borges 
of  Ederheimer,  Stein  &  Company 

IN  the  management  of  manufacturing  house  credits  and 
collections  the  problems  involved  and  the  methods 
used  are  much  the  same  as  those  of  a  wholesale  house, 
for  the  tendency  is  growing  stronger  for  the  manufac- 
turer to  deal  directly  with  the  retailer,  and  even  the 
large  consumer,  without  the  intervention  of  the  jobber. 
But  even  though  we  look  upon  the  manufacturer  as  one 
who  deals  with  the  jobber,  and  the  wholesaler  as  one  who 
deals  with  the  retailer  direct,  there  would  be  very  little 
difference  in  their  methods  of  conducting  credits,  for 
the  same  care  must  be  exercised  in  extending  credit  to  a 
large,  well-known  jobber  as  to  a  small,  unknown  retailer. 
The  only  difference  is  that  the  jobber's  account  is  many 
times  as  large  as  the  retailer's  and  hence  requires  many 
times  the  care  and  often  involves  many  times  the  worry 
that  a  smaller  account  does.  The  sources  of  informa- 
tion, the  method  of  gathering  it,  and  the  consideration 
of  it,  are  the  same  in  the  two  cases. 

It  is  in  the  attitude  he  takes,  the  object  he  has  in 
view,  his  general  policy,  that  the  credit  man  of  a  manu- 
facturing house  differs  widely  from  the  credit  man  of  a 
jobbing  house.  The  manufacturer  works  nationally  and 
even  internationally,  the  jobber  locally.  The  manu- 
facturer hails  with  delight  an  order  from  a  far  corner  of 


FACTORY    CREDITS  79 


the  country;  the  jobber  will  look  upon  it  with  suspicion. 
The  jobber  has  a  particular  territory  in  which  he  sells, 
which  he  tries  to  cover  thoroughly,  and  he  must  sell  to 
almost  any  one  of  any  standing  in  his  territory;  the 
manufacturer  need  not  sell  indiscriminately,  he  merely 
takes  the  cream  of  the  retail  trade,  the  big  retailers  who 
stand  head  and  shoulders  above  their  competitors  and 
whom  it  is  to  his  advantage  to  have  on  his  list  of  repre- 
sentatives. He  can,  in  a  way,  choose  his  own  customers, 
selecting  the  best,  and  still  dealing  with  the  poorer  risks 
through  a  middleman.  The  credit  man,  by  simply  re- 
ferring the  latter  to  a  jobber,  can  refuse  credit  without 
appearing  to  do  so. 

There  is,  however,  another  consideration  which  some- 
times compels  the  manufacturer  to  assume  an  extraor- 
dinary risk.  A  jobber  carries  various  lines  of  goods.  He 
simply  wishes  to  do  a  certain  volume  of  business  in  a 
certain  territory.  If  he  can  do  this  volume  of  busi- 
ness in  eight  cities  of  a  territory  in  which  there  are 
twelve,  he  will  let  the  other  four  go.  A  manufacturer 
is  usually  putting  out  an  advertised  line  of  goods,  and  he 
desires  to  be  represented,  broadly  speaking,  everywhere. 
He  cannot  afford  to  pass  over  one  large  commercial 
center,  for  having  by  his  advertising  created  a  demand, 
there  is  possibility  of  loss  in  failing  to  supply  the  de- 
mand and  danger  to  his  reputation  by  not  offering  facili- 
ties by  which  people  can  secure  his  goods.  Thus,  the 
credit  man  of  a  manufacturing  house,  in  order  that  his 
goods  may  be  on  sale  in  a  certain  town  or  district,  is 
often  compelled  to  take  more  dangerous  risks  to  accom- 
plish this  object  than  a  jobber  would  ever  take. 

To  demonstrate:  A  manufacturing  house  often  has 
a  new  line  of  goods  which  it  wishes  to  introduce.  To  do 
this,  it  must  be  willing  to  take  extraordinary  credit  risks. 


80 THE    CREDITOR'S    POLICY 

The  manufacturing  house  is  the  pusher  of  the  goods,  and 
often  places  them  merely  for  the  advertising  effect.  It 
is  never  the  purpose  of  a  jobbing  house  to  merely  get 
goods  before  the  public.  Its  purpose  is  always  to  sell  a 
staple  with  the  required  margin  of  profit. 

INSURING    a    systematic,   even   output  of  the  fac- 
tory by  distributing  credit  over  a  wide  territory  is 
necessary   in    handling    manufacturers'    credits. 

A  credit  man  of  a  manufacturing  house  must  always 
keep  a  watchful  eye  on  the  stock,  for  in  some  lines  of 
trade  the  goods  left  over  at  the  end  of  the  season  are  so 
much  dead  loss.  One  of  his  objects  must  be  to  distribute 
the  sale  of  goods  in  such  a  way  that  at  no  time  will  the 
bulk  of  credit  be  in  any  one  district,  and  that  at  no  time 
will  the  bulk  of  sales  be  segregated  in  a  particular  period 
of  the  year  and  so  conflict  with  a  systematic,  even  output 
of  the  factory.  This,  again,  is  more  the  duty  of  the  sales 
department,  and  yet  the  credit  man  can  render  marked 
aid.  In  most  manufacturing  business  there  are  one  or 
two  seasons  of  the  year  when  the  consumers'  demand  is 
particularly  heavy.  The  retailer  will  be  most  inclined 
to  lay  in  a  stock  of  goods  just  before  these  seasons  begin. 
I  need  hardly  to  state  that  a  factory  whose  output  is 
evenly  distributed  over  the  twelve  months  of  the  year 
will  have  a  much  lower  production  cost  per  unit  than  if 
the  output  is  crowded  into  one  or  two  periods  of  three 
months  each.  Now,  by  making  the  terms  of  payment  to 
the  jobber  and  retailer  longer,  a  credit  man  can  secure 
orders  several  months  before  the  consumer's  demand  be- 
gins. And  if  there  be  an  understanding  between  the 
credit  man  and  the  sales  department,  by  which  the  sales- 
men will  secure  such  orders  from  the  best  customers  of 
the  house,  the  credit  man  can  make  his  terms  of  payment 


FACTORY    CREDITS 81^ 

such  that  customers  will  suffer  no  disadvantage  through 
early  ordering. 

In  his  direct  relation  with  the  sales  department,  the 
credit  man  should  look  upon  it  as  he  does  upon  the  job- 
ber. It  is;  merely  a  selling  agent,  and  must  be  watched 
in  the  same  way  as  a  jobber  as  to  terms,  discounts,  and 
prices.  The  credit  man  must  really  act  as  a  tail  upon 
the  over-zealous  sales  kite.  He  should  be  the  watch  dog 
of  the  treasury.  Whether  it  confesses  it  or  not,  the 
object  of  the  sales  department  is  to  sell  as  many  goods 
as  it  can  smuggle  through  the  credit  department,  and  the 
credit  man  must  realize  this. 

But  the  most  fatal  thing  for  a  business  is  lack  of  com- 
plete harmony,  good  understanding  and  cooperation  be- 
tween the  credit  and  sales  department.  The  credit 
man's  object  is,  just  as  much  as  the  sales  department's, 
increase  in  the  volume  of  the  sales,  but  he  adds  the  sav- 
ing clause,  **with  the  lowest  percentage  of  loss  and  with 
the  least  expenditure  gf  money. ' '  As  will  appear  in  the 
course  of  this  discussion,  the  salesmen  can  be  of  much 
help  to  the  credit  man  in  his  own  work,  and  he  cannot 
afford,  under  any  consideration,  to  be  on  anything  but 
the  most  friendly,  harmonious  and  cooperative  basis 
with  them. 

The  relation  of  the  credit  man  to  the  advertising  de- 
partment should  also  be  close.  He  should  always  be 
broad  enough  to  see  that  anything  which  conduces  to  ad- 
vertising goods  and  to  giving  the  public  a  good  impression 
is  worth  while  trying.  He  must  often  sell  merely  for  the 
sake  of  being  represented  in  a  locality.  Therefore  he 
should  be  in  close  touch  with  the  advertising  depart- 
ment, in  order  to  know  what  goods  to  push,  and  on  what 
goods  to  take  risks  for  the  sake  of  publicity. 

In  the  promotion  which  is  done  through  correspond- 


^82 THE    CREDITOR'S    POLICY 

ence  and  other  means  from  the  home  oiB.ce,  the  credit 
man  should  have  an  influential  part.  There  can  be  no 
profit  in  promoting  business  with  a  dangerous  credit 
risk.  The  credit  department  should  have  in  its  hands 
the  classification  of  the  firms  which  the  promoting  de- 
partment is  trying  to  interest. 

The  knowledge  which  the  credit  man  of  a  manufac- 
turing house  should  have  is  of  three  distinct  kinds.  In 
the  first  place,  he  should  have  knowledge  of  business 
operations  and  a  general  understanding  of  financial  con- 
ditions all  over  the  country.  Inasmuch  as  the  business 
of  a  manufacturing  house  is  national,  the  credit  man 
should  know  the  condition  of  the  whole  country  and  the 
commercial  districts  into  which  it  divides  itself.  Very 
often  one  section  of  the  country  is  undergoing  an  in- 
dustrial depression,  while  another  is  enjoying  boom 
times.  He  should  be  able  to  analyze  such  financial  con- 
ditions and  to  apply  them  to  the  protection  or  further- 
ance of  his  business. 
^  In  the  second  place,  a  credit  man  should  have  a  thor- 
ough understanding  of  the  actual  manufacturing  and 
operative  details  of  his  own  business.  He  should  know 
the  value  of  goods,  the  margin  of  profit  and  the  stock 
on  hand.  He  can  afford  to  take  a  longer  chance  on 
,  goods  which  show  a  larger  margin.  He  should  be  able 
to  estimate  the  amount  of  an  order  without  having  to 
look  up  each  item ;  if  he  were  compelled  to  do  this,  his 
day  would  need  to  be  three  times  as  long  as  it  is. 

The  very  best  man  for  any  credit  department  is  one 
who  has  grown  up  with  the  business.  More  than  any 
other  executive,  the  credit  man  should  know  the  history, 
circumstances  and  possibilities  of  all  its  customers  and 
accounts  and  the  policy  and  purposes  of  his  house.  This 
he  can  only  learn  by  long  contact  with  them  in  the 


FACTORY    CREDITS 83 

bookkeeping  and  collection  departments,  and  by  an  un- 
derstanding, through  experience,  of  the  relation  of  the 
house  to  its  customers. 

BECAUSE  of  the  wide  range  of  businesses  with  which 
the  manufacturer  deals  the  credit  man  must  have  a 
broad  general  knowledge  of  business  conditions 

In  the  third  place,  a  credit  man  should  have  some  -^ 
knowledge  of  the  management  and  operation  of  any  line 
of  business  in  which  his  particular  customers  are  en- 
gaged, even  though  the  goods  which  his  house  sells  may 
consist  of  the  smallest  part  of  the  customers*  stock.  A 
manufacturing  house  may  sell  the  hardware  man,  the 
general  storekeeper,  the  business  specializing  in  its  one 
line  only,  the  manufacturer,  and  direct  to  the  customer. 
The  credit  man  must  gauge  the  credit  to  which  a  cus-  • 
tomer  is  entitled  in  proportion  to  the  ratio  which  his 
goods  bear  to  the  whole  business.  That  is,  if  a  buyer's 
credit  line  is  $10,000,  and  my  goods  will  be  only  one- 
tenth  of  that  stock,  he  is  not  entitled  to  more  than  $1,- 
000  worth  of  credit  from  me,  for  very  probably  he  will 
receive  at  least  $9,000  worth  from  other  sources.  If  each 
credit  man  were  careful  to  limit  the  extension  of  credit 
to  his  proper  proportion,  there  would  never  be  that  over- 
buying on  the  part  of  the  retailer  which  is  so  often  the 
forerunner  of  insolvency. 

If  the  credit  man  has  this  knowledge,  not  only  can  he 
judge  credits  better,  and  can  extract  from  the  agency  re- 
ports that  come  to  him  the  exact  condition  of  the  cus- 
tomer 's  business,  but  when  his  relations  with  a  customer 
have  become  intimate  enough,  he  can  act  as  an  adviser. 

Manufacturing  terms  are  not  always  cash;  often  they 
are  based  on  the  requirements  of  the  buyer.  Each  line 
of  business  has  certain  terms  in  trade  all  its  own.    These 


84 THE    CREDITOR'S    POLICY 

terms  are  dictated  by  custom  and  are  so  well  founded 
that  rarely  is  there  any  question  of  term  at  all.  Gen- 
erally speaking,  manufacturing  houses  in  the  same  line 
grant  the  same  terms. 

But  within  each  line  distinctions  are  usually  made 
between  terms  to  jobbers,  terms  to  retailers,  and  sales 
subject  to  special  terms  on  contract.  Briefly,  the  gen- 
eral principle  is  that  the  terms  should  be  such  as  to 
allow  the  buyer  to  realize  upon  the  goods  bought  before 
the  bills  for  them  fall  due.  Thus,  suppose  the  season 
for  a  certain  line  of  goods  opens  April  1  and  closes 
about  June  1.  Goods  shipped  to  jobbers  as  early  as  De- 
cember 1,  as  often  happens,  will  be  billed  to  fall  due  on 
June  1.  Now,  the  jobber  will  probably  sell  to  the  dealer 
on  March  1  on  ninety  days'  time.  He  gives  ninety  days 
in  order  that  the  dealer  may  not  be  forced  to  pay  for 
goods  until  he  himself  has  sold  them.  The  retailer  will 
get  his  payment  from  the  consumer  between  April  1  and 
June  1.  He  will  pay  the  jobber  by  June  1,  and  there- 
fore the  jobber  will  pay  the  manufacturer  with  the 
money  that  he  has  realized  on  the  goods. 

On  a  new  line  of  goods  which  a  manufacturing  house 
is  very  desirous  of  placing  on  the  market,  even  longer 
terms  than  these  may  be  given,  purely  to  attract  orders. 

To  the  retailer  the  manufacturer  will  naturally  sell  on 
shorter  terms,  inasmuch  as  he  will  sell  to  him  at  a  later 
date  than  to  the  jobber,  and  hence  not  so  long  a  time  is 
necessary  for  the  retailer  to  realize  upon  these  goods. 

Terms  by  one  manufacturer  to  another  who  uses  the 
goods  of  the  first  as  raw  material  in  manufacturing  his 
product  are  usually  the  same  as  to  a  jobber.  His  orders 
are  often  filled  on  contract,  and  terms  are  then  a  matter 
of  settlement  between  individual  manufacturers. 

Settlement  by  note,  either  with  jobbers,  retailers  or 


FACTORY    CREDITS  85 


manufacturers,  is  much  more  usual  with  a  manufactur- 
ing house  than  with  any  other  concern.  The  clever  credit 
man,  however,  can  make  the  terms  which  the  financial 
policy  and  condition  of  his  house  demands.  If  the  house 
is  working  on  small  capital,  the  credit  man,  by  giving 
discounts,  will  either  be  able  to  force  shorter  terms  on 
his  customer,  or  by  taking  notes  may  be  able  to  get  the 
use  of  the  money.  If  he  wishes  to  equalize  his  product, 
he  can  give  long  terms. 

To  make  terms  intelligently,  a  credit  man  should 
know  if  a  customer  has  many  of  his  accounts  falling  due 
at  the  same  time.  A  certain  account,  for  example,  falls 
due  on  June  1.  One  of  his  well-informed  creditors, 
knowing  this,  and  having  a  similar  maturing  date  for 
his  line,  knowing  how  difficult  it  will  be  for  the  cus- 
tomer to  pay  all  his  bills  at  this  one  date,  and  that  he 
will  probably  require  an  extension,  will  equalize  these 
payments;  for  instance,  he  will  offer  to  allow  the  cus- 
tomer to  pay  one-third  on  May  15,  one-third  on  June  1, 
and  one-third  on  June  15.  This  proposition  will  prob- 
ably look  like  a  favor  to  the  debtor,  while  it  will  be  just 
as  desirable  for  the  creditor  as  to  have  the  whole  paid  on 
'June  1,  and  much  better  than  to  grant  an  extension  on 
all  of  it. 

TT  IS  the  abuse  of  crediU  either  intentional  or  through  con- 
**•  fidence  unbacked  by  experience,  that  works  havoc  and  lays 
a  burden  on  innocent  as  well  as  guilty.  In  fact,  had  not  the 
lesson  ^een  learned  through  hard  experience,  it  might  be  more 
to  the  point  to  emphasize  the  necessity  for  being  conservative 
in  granting  credit,  than  in  dwelling  on  the  methods  to  pursue 
in  securing  thai  eleToent  so  vital  to  industrial  growth. 

— Henry  Clews 

Founder,  Henry  Clews  &  Company 


VIII 
RETAIL  CREDITS 

By  J.  W.  McConnell 
Credit  Manager,  Carson,  Pirie,  Scott  &  Company 

BETWEEN  the  credit  activities  of  a  retail  house  and 
those  of  a  wholesale  concern  there  is  very  little 
similarity.  The  two  have  wholly  different  policies ;  they 
deal  with  two  radically  different  kinds  of  patronage; 
their  attitude  toward  their  customers  differs  as  much 
as  do  the  two  classes  of  customers  themselves;  the  in- 
formation upon  which  they  base  their  decisions  is  dis- 
similar; their  methods  of  opening  and  handling  out- 
standing accounts  have  little  in  common.  Their  objects 
are,  perhaps,  alike,  but  must  be  reached  by  different 
means. 

The  object  which  a  retail  credit  man  always  has  in 
view  is  an  increase  in  sales  with  a  minimum  of  losses.  In 
other  words,  he  wants  to  open  as  many  accounts  as  pos- 
sible, but  open  them  on  such  a  basis  and  watch  them  with 
such  care  that  his  percentage  of  losses  will  not  be  raised. 
The  credit  man  should  realize  that  his  worth  to  the  house 
he  serves  is  directly  in  proportion  to  the  volume  of  his 
open  accounts.  If  his  accounts  run  to  the  amount  of  one 
million  dollars,  he  is  earning  just  twice  as  much  for  the 
house  as  if  they  were  five  hundred  thousand,  always  pro- 
vided his  percentage  of  losses  does  not  increase.  Al- 
though a  bold  statement,  it  is  nevertheless  true,  that 
with  competition  as  sharp  as  it  is  today,  a  retail  house 


RETAIL    CREDITS 87 

may  do  well  to  encourage  charge  accounts.  The  cash 
customer  flits  from  store  to  store;  a  house  has  no  bond 
strong  enough  to  hold  him;  a  charge  account  affords 
this  bond;  the  credit  customer  will  buy  where  he  has 
an  account.  It  is  part  of  the  credit  man's  work  to  bind 
customers  to  the  house. 

Now,  how  is  he  to  fulfill  this  important  function? 
The  mere  extension  of  credit  is  not  sufficient;  it  is  not 
even  a  case  of  prices  and  quality — the  sales  department 
must  work  that  end  of  it — it  is  much  more  a  matter  of 
treatment  and  service.  The  merchant  buying  from  the 
wholesaler  looks  at  but  two  things,  the  price  and  the 
quality;  service  may  enter  into  the  consideration,  but 
even  then  only  as  regards  promptness  and  accuracy. 
But  in  retail  trade,  service  and  treatment — the  methods 
of  handling  and  taking  care  of  customers — are  prime 
considerations.  The  retail  customer  is  more  of  a  human 
personality,  and,  as  a  rule,  one  of  the  * 'weaker  sex," 
consequently  less  of  a  hard  business  machine  than  the 
wholesale  buyer.  She  comes  in  closer,  more  personal 
contact  with  the  business,  she  buys  in  person  at  the  store, 
and  often  has  personal  interviews  with  the  credit  man 
or  the  heads  of  other  departments.  She  requires  more 
personal  care  than  the  merchant,  she  is  less  familiar  with 
business  operations,  more  sensitive  concerning  interroga- 
tions, and  necessitates  more  careful  handling. 

RESPONSIBILITY  for  keeping  customers  satisfied 
demands  that  the  retail  store  credit  man  have  a  gen- 
eral oversight  of  the  work  of  all  the  departments. 

Because  the  credit  man  must  accomplish  this  vitally 
important  task  of  keeping  the  customer  satisfied,  it  is 
essential  that  his  relations  with  other  departments  of  the 
house  be  such  as  to  command  attention.    He  should  ex- 


88 THE    CREDITOR'S    POLICY 

ercise  a  general  oversight  over  at  least  that  part  of  the 
sales  end  of  the  business  which  affects  the  treatment  of 
customers.  This  is  a  broad  statement,  and  will  extend 
his  activities  into  the  sales,  the  shipping,  the  complaint 
and  the  employment  departments.  To  carry  out  his 
credit  functions  properly,  he  should  be  manager  of  the 
bookkeeping,  cashier's  and  collection  departments  also. 
Their  system  must  conform  to  the  demands  of  his  work, 
and,  in  order  to  watch  his  customers  and  their  accounts 
properly,  his  touch  with  these  departments  must  be  so 
close  that  separation  between  them  is  impracticable,  if 
not  impossible. 

Having  these  objects  to  accomplish,  what  are  the  quali- 
ties necessary  for  a  successful  store  credit  man?  He 
should,  above  all  things,  be  a  man  of  great  tact,  diplo- 
matic, capable  of  handling  men,  and  more  especially 
women.  He  comes  in  personal  contact  with  a  large  num- 
ber of  people  daily,  men  and  women  who  cannot  be 
handled  in  a  technically  business  way  because  they  know 
little  of  commercial  affairs,  and  with  such  people  it  is 
much  harder  to  do  business  than  with  the  business  man. 
Under  the  necessity  of  acquiring  much  of  his  informa- 
tion by  personal  contact  with  people,  he  should  be  able 
to  draw  them  out  so  tactfully  that  he  can  get  the  infor- 
mation he  wishes  unawares.  This  also  requires  ability 
to  read  human  nature,  to  judge  of  character  and  worth 
simply  by  his  intuition ;  and  intuition  is  merely  acquired 
knowledge  and  experience  intelligently  applied. 

That  experience  in  the  operative  and  selling  branch  of 
his  business  is  of  great  value  to  a  credit  man  cannot  be 
denied.  A  credit  man  who  knows  the  goods  his  house 
carries,  their  different  grades  and  qualities,  their  values, 
their  cost  and  selling  price;  who,  through  experience, 
is  familiar  with  the  buying  of  the  goods,  or  with  the 


RETAIL    CREDITS 89 

methods  of  selling;  who  can  keep  in  touch  with  the 
methods  of  competitors  in  all  lines — such  a  man  natu- 
rally has  an  advantage,  all  other  things  being  equal,  over 
a  credit  man  who  has  always  been  an  office  man. 

As  the  wholesale  credit  man  should,  to  some  extent, 
inform  himself  concerning  the  general  financial  condi- 
tions of  the  country,  so  the  credit  man  in  the  retail 
store  should  keep  in  touch  with  the  local  financial  or 
commercial  conditions,  only  his  information,  less  exten- 
sive, must  be  much  more  minute  and  specific.  If  a  large 
manufacturing  house  in  his  locality  cuts  down  its  force, 
if  a  body  of  men  go  on  a  strike,  if  a  plant  is  about  to 
move  away  from  the  city,  he  must  know  all  the  facts, 
for  they  are  of  value  to  him  in  making  his  decisions  on 
credit  extensions.  The  credit  man,  if  he  keeps  his  eyes 
and  ears  open,  and  is  quick  at  putting  two  and  two  to- 
gether, will  learn  and  absorb  many  facts  each  day  con- 
cerning his  customers.  The  better  he  knows  his  com- 
munity, and  its  people,  the  more  quickly  and  intelli- 
gently will  he  be  able  to  make  his  judgments,  the  less 
he  will  annoy  his  patrons,  and  the  safer  his  decisions 
will  be. 

HONESTY,    integrity,    worth   and    resources  form 
the  principal    basis   of  retail  credit — these  facts 
are    seldom    obtained    by   inquiry    into    past    history. 

The  information  upon  which  the  credit  man  bases  his 
judgment  is  such  as  will  tell  him  the  honesty  and  in- 
tegrity of  his  customer,  his  worth  and  resources.  His 
past  history  is  of  little  value,  except  in  so  far  as  it  relates 
to  his  credit  record.  The  fact  that  a  customer  has  gone 
through  bankruptcy  or  was  slow  in  making  payments 
five  years  ago  does  not  affect  his  retail  credit  if  his 
present  character  is  good ;  his  whole  business  and  social 


90 THE    CREDITOR'S    POLICY 

record  are  not  inquired  into,  nor  his  habits  or  associates. 
The  retailer  wants  specific  facts;  the  residence  of  the 
applicant,  his  position  or  source  of  income,  the  extent  of 
his  property,  his  present  or  past  accounts,  even  such 
questions  as  the  amount  of  his  bank  account,  are  con- 
sidered legitimate.  In  case  the  applicant  is  a  married 
woman,  these  questions,  of  course,  refer  to  her  husband. 

This  information  is  derived  from  the  applicant  him- 
self, from  outside  sources,  or  both.  Credit  accounts  are 
opened  in  one  of  two  ways.  Either  the  buyer  makes 
direct  application  for  credit,  or  he  makes  a  purchase 
and  simply  requests  the  salesperson  to  have  it  charged. 
In  either  case  the  credit  man  bends  his  efforts  to  making 
his  decision  without  recourse  to  personal  interrogations. 
Such  a  course  will  bring  trade,  for  it  is  simply  one 
point  in  careful  handling  of  customers.  Women  espe- 
cially have  such  a  terror  of  these  interviews,  that  the 
possibility  of  passing  through  the  ordeal  will  often  deter 
them  from  attempting  to  open  an  account.  They  think 
that  all  their  private  history  and  personal  secrets  will 
be  brutally  exposed  to  the  examination  of  a  cold-blooded 
person  who  will  delight  in  prying  into  their  personal 
affairs.  A  house,  therefore,  which  obtains  a  reputation 
for  not  requiring  personal  examination  will  draw  these 
timid  accounts.  Such  a  course  also  flatters  a  customer, 
for  it  gives  her  the  impression  that  she  is  so  well  and 
favorably  known  that  she  need  present  no  credentials. 

When  a  personal  interview  is  absolutely  necessary,  the 
credit  man  attempts  to  make  it  as  short  and  as  imper- 
sonal as  possible.  He  may  obtain  the  information  de- 
sired in  a  few  direct  questions.  But  if  the  applicant 
seems  sensitive,  he  should  endeavor  to  draw  out  the  in- 
formation he  wants  in  an  indirect  way ;  to  do  this  with- 
out seeming  to  pry  unnecessarily  into  an  applicant's  pri- 


RETAIL    CREDITS  91 


vate  affairs,  and  so  hurting  his  sensibilities,  is  a  deli- 
cate task.  The  credit  man  must  often  learn  his  facts 
in  the  course  of  a  general  conversation,  by  inference  from 
statements  and  admissions,  and  from  his  own  observa- 
tion of  the  applicant.  The  facts  thus  obtained  are  usu- 
ally verified  from  outside  sources. 

ilf  the  applicant  is  a  business  man  he  can  be  investi- 
gated through  the  medium  of  the  mercantile  agencies, 
as  if  he  were  buying  an  invoice  of  goods  from  a  wholesale 
house,  and  all  information  necessary  can  be  thus  ac- 
quired. In  case  he  is  not  engaged  in  mercantile  pursuits, 
the  commercial  agencies  are  often  able  to  afford  the  facts 
the  credit  man  needs.  If  a  man  has  even  had  any  doubt 
cast  upon  his  credit,  if  he  has  ever  been  sued,  if  an 
account  of  his  has  ever  needed  the  services  of  a  collec- 
tion agency,  if  he  has  any  old  unpaid  bills,  or  if  his  prop- 
erty is  encumbered — all  such  facts  they  almost  inva- 
riably have  on  record. 

The  retail  stores  of  the  large  cities  have  no  organized 
system  of  credit  clearings  or  of  reporting  delinquent 
customers.  The  only  time  the  store  applies  to  another 
for  information  is  when  an  applicant  gives  another  store 
with  which  he  has  an  account  as  a  reference;  then  the 
latter  store,  will  give  the  information  desired,  more  as 
a  favor  to  its  customer,  to  be  sure,  than  to  the  house 
inquiring. 

HOW  salesmen  handle  requests  for  credit  from  new 
customers;  how  the  credit  man  obtains  information 
on  customers'  responsibility;  opening  the  account. 

When  a  buyer  who  has  no  account  requests  goods 
charged,  since  the  clerk  who  approves  all  charge  sales 
will  not  find  him  on  his  list,  the  sale  will  be  passed  up 
to  the  credit  manager.     He  will  attempt  to  pass  on  the 


92 THE    CREDITOR'S    POLICY 

advisability  of  opening  this  account  without  a  direct 
interview  with  the  buyer,  and  will  set  in  motion  this 
machinery  for  investigation.  The  facts  thus  obtained 
are  usually  sufficient.  Sometimes  the  buyer  is  so  well 
known  and  of  such  undoubted  integrity  as  to  need  no 
investigation  at  all.  The  account  is  opened  and  a  polite 
note  sent  to  the  customer,  assuring  him  that  the  oppor- 
tunity of  adding  his  name  to  the  list  of  "charge  cus- 
tomers" is  appreciated. 

Even  though  investigation  in  any  case  proves  that  the 
advisability  of  extending  credit  is  a  little  doubtful,  the 
retail  credit  man  has  a  much  wider  field  than  his  whole- 
sale confrere  for  using  his  ingenuity  in  seeking  a  safe 
basis  on  which  to  open  an  account.  Various  means  for 
securing  and  guaranteeing  or  limiting  the  account  may 
be  devised  to  suit  individual  cases. 

Every  account  has  a  limit  placed  upon  the  monthly 
credit  which  is  to  be  extended  to  the  customer.  This, 
however,  is  not  a  fixed  line  beyond  which  there  is  no 
advance ;  it  is  more  a  means  of  guiding  the  work  of  the 
employees  of  the  credit  department.  It  simply  means 
that  when  a  customer's  purchases  for  any  month  have 
reached  this  limit,  further  sales  must  be  submitted  to 
the  credit  manager  for  approval.  It  is  a  kind  of  safety- 
valve  by  which  an  account  is  brought  to  the  attention 
of  the  head  of  the  credit  department  when  it  has  reached 
a  certain  stage.  The  amount  of  the  limit  may  be 
changed  several  times  during  the  same  month,  depend- 
ing on  the  condition  of  the  customer's  account  and  the 
kind  of  purchases  he  is  making. 

The  real  work  of  the  credit  man  is  not  so  much  in 
opening  accounts  as  in  keeping  in  close  touch  with  them 
after  they  are  started  and  making  prompt  collections. 
The  hold  of  the  retail  store  on  its  charge  customers  is 


RETAIL    CREDITS 93 

far  less  tangible  than  that  of  the  jobber.  The  mer- 
chant buying  from  the  wholesale  house  has  assets  in  his 
business;  he  must  pay,  or  confess  insolvency  and  lose 
his  business  reputation;  he  cannot  move  from  one  com- 
munity to  another  with  ease.  No  such  considerations 
weigh  with  the  retail  buyer;  the  credit  man  must  sub- 
stitute for  this,  unceasing  watchfulness  over  his  account 
and  his  customers  themselves. 

In  a  large  house  it  is  absolutely  necessary  that  he 
keep  a  record  of  his  customers.  The  most  convenient 
form  is  a  card  index  arranged  alphabetically,  each  card 
containing  in  concise  form  the  salient  facts  and  informa- 
tion regarding  each  customer.  Any  new  information 
secured  is  at  once  entered  on  these  cards,  so  that  they 
are  kept  up  to  date. 

The  credit  man^s  second  source  of  information  re- 
garding his  open  accounts  are  his  ledger  records.  With 
thousands  of  accounts  on  his  books  it  is  of  course,  im- 
possible for  the  credit  man  to  keep  informed  regarding 
the  status  of  all  his  accounts.  He  must  be  satisfied  if  he 
can  keep  in  touch  with  the  more  vital  accounts — ^those 
which  are  overdue.  This  he  can  do  most  easily  by  look- 
ing over  those  of  the  statements  sent  out  by  the  book- 
keeping department  on  the  first  of  each  month  which 
contain  overdue  items.  In  addition  to  this,  the  credit 
man  should  be  notified  the  moment  an  account  reaches 
the  limit;  the  credit  limit  is  placed  at  the  top  of  the 
ledger  sheet  of  each  customer;  the  bookkeeper,  as  he 
enters  the  previous  day 's  sales  each  morning,  can  make  a 
memorandum  of  those  accounts  which  have  reached  or 
overrun  the  limit,  and  place  them  on  the  credit  man's 
desk. 

In  collections,  again,  the  credit  man  must  exercise 
tact  and  use  his  knowledge  of  his  customers  and  their 


THE    CREDITOR'S    POLICY 


affairs ;  and,  knowing  their  peculiarities  better  than  any 
one  else  in  the  house,  he  can  best  determine  the  general 
policy  to  be  pursued  in  collections  and  the  procedure  in 
individual  cases.  Women,  and  many  men  also,  take 
offense  at  even  a  reminder  of  indebtedness,  classing  all 
such  as  "duns."  They  must  be  treated  very  delicately, 
even  though  their  accounts  are  overdue.  It  is  at  bottom 
a  question  of  making  them  think  that  they  are  paying 
when  they  please,  and  yet  so  influencing  them  that  their 
time  of  '  *  paying  when  they  please ' '  will  correspond  with 
the  time  when  the  house  wants  them  to  pay.  By  the  use 
of  tactful  reminders,  the  right  kind  of  correspondence, 
and  indirect  methods,  customers  can  be  trained  to  be 
prompt  payers.  Some  customers,  perfectly  good,  pay 
only  every  sixty  days  or  even  quarterly.  Their  wishes 
must  be  observed,  and  one  slip  in  the  way  of  an  insistent 
dun  letter  may  lose  the  account.  Credit  men  find  that 
the  financial  arrangements  of  husband  and  wife  differ 
greatly  in  different  families.  Some  men  do  not  wish  any 
bills  contracted  by  their  wives  to  come  to  themselves  or 
to  their  offices,  but  insist  that  they  go  directly  to  their 
wives;  others  do  not  want  their  wives  to  see  any  bills, 
but  desire  to  have  bills  sent  to  themselves.  Such  wishes 
must  be  known  and  observed. 

PROMPT  collections  not  only  save  losses  in  bad  debts 
and  decrease  the  amount  of  working  capital  necessary 
for  running  a  business,  but  also  increase  sales. 

iSharp  collections  reduce  the  percentage  of  losses  and 
the  expense  of  running  a  business,  and  increase  sales. 
Ajs  the  age  of  a  bill  increases  the  chance  of  collecting  it 
decreases;  repeated  attempts  at  collection  often  irritate 
a  customer  and  make  him  even  more  prone  to  put  off 
payment.     The  added  expense  comes  in  two  ways;  in 


RETAIL    CREDITS 95 

the  time  and  money  spent  by  the  collectors  and  in  cor- 
respondence; and,  what  is  more  vital,  in  the  much 
greater  amount  of  capital  necessary  for  the  car- 
rying of  overdue  accounts.  "When  a  house  has  thousands 
of  open  accounts  on  its  books,  running  into  the  hundreds 
of  thousands  in  money,  the  saving  in  the  interest  on  the 
capital  tied  up  in  bills  receivable  when  they  are  collected 
ten  days  instead  of  sixty  days  after  due,  is  no  inconsider- 
able item. 

A  retail  house  has  its  corps  of  collectors  like  a  whole- 
sale house,  but  their  method  of  work  is  wholly  different. 
A  man  engaged  in  business  expects  statements  and  per- 
sonal collectors  when  his  account  becomes  overdue.  The 
majority  of  debtors  of  a  retail  house  consider  a  reiter- 
ated demand  for  payment  as  an  affront,  and  a  call  from 
a  collector  as  an  insult.  Nevertheless,  the  retail  mer- 
chant must  look  after  his  collections  even  more  sharply 
than  a  wholesaler,  for  only  in  this  way  can  he  make  up 
for  more  or  less  risky  extensions  of  credit. 

That  prompt  collection  increases  sales  results  from  the 
fact  that  a  customer,  having  a  large  bill  overdue  at  one 
store,  will  transfer  his  patronage  to  another  establish- 
ment because  of  fear  of  being  refused  further  credit  at 
the  first  and  a  dislike  of  increasing  his  account. 

All  possible  persuasion  and  peaceable  efforts  shouid  be 
used  in  collecting  before  resorting  to  more  strenuous 
methods.  When  an  account  reaches  the  stage,  however, 
where  it  is  apparent  that  the  debtor  is  attempting  to 
avoid  his  debt,  and  it  becomes  a  question  of  getting  pay- 
ment in  the  quickest  and  surest  way,  legal  steps  should 
be  taken.  Before  taking  such  steps  the  credit  man  must 
have  made  up  his  mind  that  it  is  to  his  interest  to  close 
the  account  in  question.  For,  once  he  has  taken  recourse 
to  law,  he  may  as  well  make  up  his  mind  that  the  cus- 


96 THE    CREDITOR'S    POLICY 

tomer  is  lost  to  him.  It  is  bad  policy  for  him  to  reopen 
an  account  with  such  a  man,  not  only  because  he  has 
proved  himself  untrustworthy  and  unprofitable,  but  also 
because,  when  a  person  is  sued  by  a  house,  justly  or  un- 
justly, one  can  figure  that  he  will  be  itching  to  put  that 
house  into  a  hole  at  the  first  opportunity. 

The  whole  matter  of  collections,  even  more  than  that 
of  making  credits,  depends  upon  a  store's  class  of  pa- 
trons. A  high-grade,  wealthy  patronage  needs  an  en- 
tirely different,  much  more  subtle  and  less  strenuous  col- 
lection system  than  customers  who  belong  to  the  less 
wealthy  classes. 


^ 


PERSONALITY  in  husinessr  Those  three  words  speli^ 
^  to  my  mind,  the  most  powerf id  factor  in  business  today. 
Financial  resource,  of  course,  is  necessary  in  the  business 
field;  foresight  and  the  ability  to  grasp  opportunities  as 
they  arise  achieve  much.  But,  it  is  only  when  these  elements 
are  combined  vMh  that  pecidiar  characteristic  of  the  indi- 
vidual which  we  call  personality — that  faculty  of  personal 
power,  personal  impression  and  personal  understanding — 
thai  they  attain  the  best  and  most  permanent  results. 

— George  H.  Barbour 

Vice-President  and  General  Manager,  Michigan  Stove  Company 


IX 


INSTALMENT  CREDITS 

By  E.  F.  Kennedy 
President,  The  E,  F.  Kennedy  Furniture  Company 

MERCHANTS  who  sell  on  the  instalment  basis  have 
the  advantage  over  the  retailer  in  one  way,  in 
that  they  "asnally  receive  a  cash  down  payment  for  part 
of  the  invoice  and  have  a  contract  or  mortgage  of  some 
kind  for  the  remainder,  which  protect  them  against  the 
loss  of  the  goods,  unless  the  customer  is  openly  dishonest 
and  fraudulent.  On  the  other  hand,  the  instalment  dealer 
works  at  a  disadvantage  as  compared  with  the  retailer, 
for  he  virtually  cannot  discriminate  as  to  whom  he  shall 
trust.  And  as  instalment  man,  he  must  sell  on  this  basis 
to  all  who  offer  themselves  and  can  show  any  record  at 
all.  If  he  refuses  them,  he  not  only  loses  this  order,  but 
very  likely  the  entire  trade  of  the  customer.  The  re- 
tailer, if  he  does  not  think  it  advisable  to  extend  credit, 
can  often  persuade  the  applicant  to  pay  cash,  and  thus 
keep  his  patronage.  The  retailer  can  put  off  granting 
credit  for  months  until  he  has  traded  with  the  customer 
and  knows  his  trustworthiness  from  personal  experience, 
without  giving  serious  offense  or  necessarily,  losing  a  sale 
or  a  customer.  If  an  instalment  merchant  refuses  credit, 
there  is  no  other  alternative  open — the  sale,  and  prob- 
ably the  customer,  is  lost. 

In  granting  credit  to  a  new  customer,  the  credit  man 
of  an  instalment  house  must  depend  almost  entirely  on 


98    THE    CREDITOR'S    POLICY 

his  intuitions  and  experience  in  judging  men.  He  has 
three  classes  to  face ;  those  who  are  honest  and  intend  to 
pay,  and  who  will  pay ;  those  who  are  honest  and  of  good 
intentions,  but  who  overestimate  their  ability  to  pay  and 
eventually  will  fail  to  pay ;  and  those  who  never  intend 
to  pay  and  are  simply  trying  to  obtain  the  goods  under 
false  pretenses. 

The  latter  class  is  very  small.  Such  strong  guards 
have  been  placed  around  the  instalment  contract  that 
fraud  is  difficult  and  dangerous.  The  great  majority 
of  buyers  are  of  good  intentions,  and  a  credit  man  can 
make  no  bigger  mistake  than  to  go  on  the  assumption 
that  all  people  are  dishonest  dead  beats,  and  that  his 
business  is  to  keep  the  house  from  being  cheated.  This 
suspicious  and  pessimistic  attitude  will  hurt  his  work 
and  the  trade  of  his  house  rather  than  help  it.  There  is 
no  man  or  woman  so  proud  and  sensitive  as  the  ''poor 
but  honest,'^  and  it  is  largely  with  this  class  of  people 
that  the  instalment  house  deals. 

QUICK  decisions  are  required  of  the  instalment  credit 
mai< — a  few  minutes'  conversation  with  the  prospeo 
live  buyer  must  determine  the  value  of  the  risk. 

The  credit  man,  having  the  bill  of  goods  ordered  and 
the  buyer  himself  before  him,  must  decide  almost  on  the 
spot,  from  his  impressions  of  the  individual  and  the  in- 
formation he  obtains  from  his  direct  questioning, 
whether  to  approve  the  sale  and  allow  the  credit.  The 
instalment  house  is  not  now,  as  formerly,  in  the  position 
of  one  granting  favors,  and  so  permitted  to  ask  any  ques- 
tions, to  dictate  any  terms,  and  generally  tread  all  over 
the  sensibilities  of  the  buyer.  There  is  now  too  much 
competition  in  this  line  of  business.  Buying  on  instal- 
ments no  longer  reflects  any  discredit  on  the  buyer  as  it 


INSTALMENT    CREDITS 99 

once  did ;  he  is  quite  as  likely  as  not  to  have  money  in- 
vested or  in  a  savings  account  which  he  does  not  wish 
to  draw  upon.  He  has  a  choice  between  houses,  and  he 
usually  bases  his  selection  on  their  methods  of  inquiry 
and  their  terms ;  he  has  consequently  become  more  inde- 
pendent and  sensitive,  and  he  must  be  treated  accord- 
ingly. 

The  credit  man  must,  of  course,  secure  certain  in- 
formation relative  to  a  customer's  stability  and  circum- 
stances, preliminary  to  approving  a  sale.  The  greater 
part  of  this  information  he  must  get  directly  from  the 
customer  himself.  And  just  because  this  customer  will 
be  sensitive,  the  credit  man  should  learn  as  much  as  pos- 
sible by  indirect  questioning  in  the  course  of  a  pleasant, 
rambling  conversation ;  he  must  lead  up  to  unconscious 
admissions  and  side-remarks  and  implications.  The 
usual  information  desired  ia:  the  reason  the  customer  is 
buying  on  instalments;  the  source  of  his  income,  from 
which  the  instalments  are  to  be  paid ;  where  the  person, 
husband,  father,  or  whoever  is  responsible  for  the  pay- 
ments, works ;  the  general  circumstances  of  the  customer 
as  to  property  owned,  bank  account,  and  so  on. 

If  the  credit  man  starts  on  his  search  for  this  informa- 
tion from  an  attitude  of  suspicion,  he  is  bound  to  an- 
tagonize the  customer.  He  must  rather  appear  sympa- 
thetic, obliging,  as  if  all  were  a  mere  formality  and  un- 
necessary for  the  extension  of  credit  in  this  case.  Pleas- 
antness, an  appearance  and  tone  of  friendliness,  a  sincere 
and  apparent  desire  to  be  helpful  and  accommodating, 
go  a  long  way  in  any  kind  of  business  activity,  but  no- 
where are  they  more  to  be  emphasized  than  here. 

The  credit  man  must  virtually  make  his  decisions  on 
the  spur  of  the  moment,  judging  of  the  truth  of  the 
facts  given  him  from  general  appearances  and  his  in- 


100 THE    CREDITOR'S    POLICY 

tangible  impressions.  He  can,  and  very  often  does,  in- 
vestigate the  facts  he  has  obtained  before  the  goods  are 
delivered,  but  the  most  he  can  do  is  to  find  out  whether 
the  place  of  employment  given  is  correct,  and  even  this 
he  must  do  secretly,  for  the  information  is  usually  given 
confidentially.  A  customer  usually  does  not  wish  his 
employer  or  any  one  else  to  know  that  he  is  buying  in 
this  manner,  and  consequently  verification  of  the  facts 
he  gives  cannot  be  made  openly.  In  this  respect  the 
wishes  of  the  customers  must  be  observed  if  his  account 
is  to  be  kept  by  the  house.  The  credit  man  must  judge 
of  the  customer's  honesty  from  his  general  appearance 
and  attitude;  he  must  determine  whether  the  different 
items  of  information  he  gives  agree,  and  whether  the 
goods  bought,  both  as  to  the  size  of  the  order  and  the 
quality  of  the  goods,  seem  to  be  in  accord  with  the  ap- 
parent circumstances  of  the  customer. 

The  credit  man  should  always  be  on  the  lookout  for 
*'dead  beats.*'  They  are  either  very  hard  or  very  easy 
to  recognize,  for  either  they  are  clumsy  and  can  be  de- 
tected at  first  sight  from  their  appearance  or  from  the 
apparent  invention  of  the  information  they  give,  or  they 
are  very  clever  and  put  up  an  almost  undetectable  front. 
The  only  way  to  cope  with  the  latter  is  to  make  the  con- 
tract of  sale  so  binding,  and  the  follow-up  and  collection 
system  so  stringent,  that  they  cannot  get  an  opportunity 
to  carry  out  their  fraudulent  designs. 

The  hardest  task  of  the  credit  man  is  to  detect  such 
among  the  honest  and  good-intentioned  people  as  are  evi- 
dently over-reaching  their  resources  in  their  purchases. 
To  discover  such  people  requires  deep  insight  into  char- 
acter and  a  clever  analysis  of  the  information  under  re- 
view. Long  experience  with  instalment  sales  and  ac- 
counts will  enable  the  credit  man  to  estimate  with  re- 


INSTALMENT    CREDITS 101 

markable  accuracy  the  approximate  paying  value  of  a 
givfen  income  or  certain  resources.  Even  when  he  has 
detected  such  a  person,  however,  a  task  equally  hard  is 
to  handle  the  customer  in  such  a  way  as  to  make  a  sale 
and  still  be  safe.  If  his  judgment  places  a  prospective 
buyer  in  this  class,  the  credit  man  probably  will  not  wish 
to  ''turn  him  down";  he  may  come  to  be  a  good  cus- 
tomer. The  credit  man  must  seek  to  bring  the  order  to  a 
safe  basis. 

COLLECTIONS  are  the  vital  fart  of  a  credit  man*s 
duties — in  no  other  line  of  business  is  close  supervi- 
sion of  this  phase  of  credit  work  so  important. 

The  collection  department  of  any  business  house 
should  be  closely  allied  to  the  credit  department,  but  in 
no  business  is  this  so  necessary,  and  in  fact  indispensa- 
ble, as  in  an  instalment  house.  A  vigilant,  sharp,  intelli- 
gent collection  policy  and  system  will  do  much  more  to 
reduce  the  percentage  of  foreclosures  and  bad  accounts 
than  the  best  credit  making,  for  not  only  can  a  good  col- 
lection department  save  a  doubtful  account,  but  a  poor 
one  can  lose  many  good  bills. 

Even  more  important  than  this  is  the  fact  that  prompt 
collections  increase  the  volume  of  sales.  A  credit  man 
who  knows  his  collections  are  being  well  taken  care  of 
can  make  his  terms  a  little  more  liberal,  and  can  thus 
accept  more  orders  and  will  in  the  end  draw  more  trade. 
Then,  too,  a  customer  who  gets  his  account  paid  up 
promptly  will  come  back  for  a  new  purchase  sooner  and 
he  will  be  more  apt  to  come  back  anyway,  for  prompt 
payments  are  the  easiest  to  make  and  cause  the  least 
trouble  and  friction  between  house  and  customer. 

Each  account  should  be  carefully  watched,  not  a  day's 
delay  in  payment  allowed  without  the  reason  being 


102  THE    CREDITOR'S    POLICY 


known,  and  the  circumstances  and  movements  of  cus- 
tomers zealously  followed.  It  is  the  regular,  permanent 
customer  who  brings  the  profit,  and  the  regular  cus- 
tomer is  the  one  with  whom  the  house  never  has  the  least 
trouble;  customers  can  be  trained  to  pay  promptly  as 
they  can  be  encouraged  to  be  dilatory.  The  longer  a 
payment  is  put  off,  the  heavier  the  burden  becomes.  The 
point,  that  the  older  a  bill  is  the  harder  it  is  to  collect, 
is  especially  well  taken  in  case  of  instalment  accounts, 
for  delay  on  one  payment  is  going  to  throw  all  those 
that  follow  out  of  gear  and  make  their  collection  just 
so  much  more  difficult. 

Foreclosures  should  be  a  last  resort.  Under  no  cir- 
cumstances does  it  pay  to  force  a  seizure  of  the  goods 
sold  when  there  is  the  least  possibility  of  peaceable  set- 
tlement. It  is  much  better  to  extend  the  mortgage, 
grant  more  time,  coax  the  customer  along  as  far  as  pos- 
sible. Foreclosing  invariably  results  in  the  loss  of  the 
customer,  is  liable  to  give  the  house  a  bad  reputation, 
whether  justly  or  unjustly,  and  is  never  profitable.  The 
goods  returned  are  always  worn  and  must  be  resold  at 
second-hand  prices.  The  credit  and  collection  depart- 
ment may  have  "no  profit  on  account"  chalked  up 
against  it,  but  any  number  of  these  show  better  manage- 
ment than  a  row  of  foreclosures. 


T  ET  your  customer  know  that  a  'personal  interest  attaches 
*-^  to  him — a  real  personal  interest  that  is  not  measured 
wholly  by  his  orders  and  his  dollars — and  you  will  win  in 
return  that  close  personal  association  and  active  support 
that  builds  up  business. 

— George  H.  Barbour 

Vice-President  and  General  Manager,  Michisan  Stove  Company 


X 

CREDITS  AND  COLLECTIONS 
IN  FOREIGN  TRADE 


By  John  E.  Gardin 

First  Vice-President  and  Manager,  Foreign  Exchange  Department, 

National  City  Bank  of  New  Yorl^ 


AMERICAN  merchants  who  seek  a  market  for  their 
wares  in  foreign  countries  are  confronted  with  the 
fact  that  they  know  very  little  about  their  customers, 
nor  do  they  know,  as  a  rule,  anything  about  the  cus- 
toms prevailing  in  the  commercial  centers  abroad.  This 
lack  of  knowledge  not  only  leads  to  monetary  loss,  but 
also  to  loss  of  prestige  in  consequence  of  the  matter  not 
being  handled  according  to  his  customer's  views,  thus 
piling  up  difficulties  at  the  outset  of  his  career  as  a 
factor  in  foreign  markets.  Chauvinism  is  rampant  in 
all  countries,  and  the  foreigner  entertains  the  same  view 
as  the  American  does  in  a  great  many  respects,  that 
there  is  nothing  good  to  come  from  any  country  but  his 
own. 

It  is  only  by  dint  of  the  hardest  kind  of  work,  the 
untiring  efforts  of  our  consular  officers  abroad  and  the 
ceaseless  energy  of  the  pioneers  in  this  country  in 
foreign  trade,  that  America  has  been  at  last  able  to 
bring  before  the  public  in  foreign  lands  the  excellence 
of  its  goods.  To  what  extent  American  products  are  in 
demand  on  the  other  side  of  the  water  has  been  fully 
demonstrated.  The  fame  of  the  American  producer  is 
now  well  established,  and  the  great  corporations  who  are 
seeking  an  outlet  for  their  surplus  wares  have  no  diffi- 


104 THE    CREDITOR'S    POLICY 

culty  in  selling  as  mueh  of  their  product  as  they  desire, 
and  the  only  question  is  that  of  price. 

However,  this  was  not  accomplished  without  the  great- 
est labor  on  the  part  of  such  corporations  through  the 
organization  of  agencies  in  all  the  principal  cities  of 
Europe  and  elsewhere,  by  the  organization  even  of  banks 
to  handle  the  financial  end  of  their  business.  The  result 
is  that  their  sales  abroad  now  run  into  hundreds  of  mil- 
lions of  dollars  annually. 

MERCHANTS    engaged   in  foreign  trade    tdthout 
means  to  establish  an  organization  to  protect  their 
interests  are  dependent  on  banks  for  assistance. 

The  ordinary  merchant,  in  the  first  place,  has  not  the 
means  at  his  command  to  perfect  an  organization  which 
will  protect  his  interests  at  every  stage  of  the  sale, 
but  must  depend  upon  his  own  individual  efforts,  aided 
by  integrity  and  honesty,  in  dealing  with  his  clients.  In 
this  respect  he  is  ably  assisted  by  the  various  banking 
institutions  of  importance  in  this  country,  all  of  which 
have  large  and  extended  foreign  connections. 

Advantage  is  taken  frequently  by  unscrupulous  con- 
cerns abroad  to  work  schemes  upon  the  American  mer- 
cantile community,  and  these  are  often  successful.  Par- 
ticularly in  Holland  there  is  a  well  organized  clique  of 
swindlers,  who,  on  the  basis  of  advertisements  in  trade 
journals,  send  in  orders  for  goods  and,  upon  receiving 
them,  disappear  from  the  scene  altogether,  only  to  re- 
appear under  a  different  name  perhaps  in  a  different 
city.  This  gang  has  for  a  number  of  years  successfully 
exploited  American  exporters.  The  same  thing  is  going 
on  in  other  countries,  but  not  to  the  same  extent.  It 
therefore  behooves  the  American  exporter  to  have  great 
care  whom  he  is  dealing  with ;  and  he  can  do  so,  for  he 


FOREIGN    CREDITS 105 

has  abundant  opportunity  before  shipping  goods  to  in- 
form himself  in  regard  to  the  solvency  of  any  would-be 
clients. 

England  has  an  exceedingly  elaborate  and  reliable 
system  of  commercial  reports  in  the  well  tabulated  re- 
turns of  the  commercial  agency  of  Seyd's,  commonly 
known  as  Seyd's  Reports.  In  these  reports  every  com- 
mercial house  of  any  standing  whatever  is  quoted  in 
four  different  columns,  giving  trade  extent,  monetary 
credit  and  other  information  which  serves  as  a  guide  to 
the  exporter.  These  reports  are  the  most  reliable  of  any 
published  in  any  country,  our  own  not  excepted.  Seyd  's 
Reports  alone  constitute  a  library,  and  while  they  are  ex- 
pensive, to  a  large  commercial  house  doing  an  important 
business  with  England  they  are  an  absolute  necessity. 
The  small  merchant  need  not  go  to  this  expense  for  gain- 
ing the  benefit  of  this  elaborate  system,  as  every  bank- 
ing institution  of  any  importance  doing  a  foreign  busi- 
ness has  this  work  in  its  library,  and  they  are  always 
willing  to  allow  the  use  of  it  to  their  clients. 

In  addition  to  these  reports,  every  large  banking  in- 
stitution has  files  of  information  concerning  the  stand- 
ing of  practically  every  important  business' house  in  the 
world,  and  the  benefit  of  years  of  labor  in  this  respect 
is  placed  at  the  disposal  of  business  men  at  the  expense 
of  perhaps  a  two-cent  postage  stamp.  Should,  contrary 
to  expectation,  the  files  be  incomplete  to  the  extent  of 
just  the  one  party  that  is  inquired  about,  this  deficiency 
can  be  remedied  instantaneously  at  a  slight  cost  and  de- 
lay by  making  inquiry  through  its  connections  abroad  as 
to  the  standing  of  the  party  desired.  In  the  event  of  an 
important  deal  this  inquiry  can  be  made  by  cable,  so 
that  the  reply  would  be  to  hand  within  a  few  hours. 

The    most    reliable    information    concerning    foreign 


106 THE    CREDITOR'S    POLICY 

parties,  of  course,  is  to  be  obtained  only  through  foreign 
bankers.  But  the  foreign  banker  declines,  and  with  good 
reason,  to  impart  any  information  concerning  com- 
mercial houses  in  his  locality  to  any  but  banks  and 
bankers  with  whom  he  is  in  connection.  Therefore,  the 
merchant  who  desires  information  should  apply  to  his 
bank,  which,  in  its  turn,  will  send  the  matter  on  to  its 
proper  destination,  so  that  an  answer  will  be  forthcoming 
as  fast  as  the  mail  or  telegraph  can  bring  it. 

My  advice,  therefore,  is :  Do  not  hesitate  to  call  upon 
your  banker.  He  is  at  all  times  ready  to  aid  commerce 
in  all  its  branches  and  does  so  most  efficiently.  Any 
reason  to  the  effect  that  doing  this  service  brings  no 
returns  to  him  is  a  fallacious  one.  It  is  true  it  brings  no 
immediate  returns;  quite  to  the  contrary,  it  costs  him 
money,  in  the  time  of  his  employees,  in  postage,  and  so 
on.  But  the  advantage  is  a  collateral  one  to  the  ex- 
tent that  it  furthers  the  business,  and  if  the  information 
is  satisfactory  and  leads  to  engagements,  the  banker 
sooner  or  later  is  sure  to  get  his  share.  Procuring  in- 
formation for  his  friends  is  simply  casting  bread  upon 
the  waters.  The  returns  will  surely  come  some  time  or 
another.  Consequently  the  merchant  need  not  hesitate 
to  employ  his  bankers  with  perfect  freedom,  and  may 
rest  assured  that  the  service  is  not  grudgingly  rendered. 

INFORMATION    concerning    inquiries    obtained 
through  foreign  credit  agencies  should  be  supplemented 
and  verified  by  information  obtained  from  other  sources. 

On  the  continent  there  are  well-established  bureaus 
which  impart  what  credit  information  is  obtainable  for 
a  certain  fee,  which  as  a  rule  is  rather  a  small  one ;  still 
these  reports,  as  a  general  thing,  are  reliable  and  are  an 
indication  as  to  whether  the  party  with  whom  the  mer- 


FOREIGN    CREDITS  107 


chant  in  this  country  intends  doing  business  is  reputable 
or  not.  Nevertheless,  the  information  from  the  banker, 
as  a  supplementary  matter,  is  absolutely  essential,  inas- 
much as  the  private  institution  very  reluctantly  or  in 
fact  rarely  ever  gives  information  that  is  bad,  owing  to 
the  stringent  libel  laws  in  foreign  lands. 

Quite  frequently  the  argument  is  advanced:  **What 
do  I  care  what  the  standing  of  the  parties  abroad  is  ?  I 
can  arrange  matters  in  such  a  way  that  they  cannot  get 
hold  of  the  goods  without  paying  my  bill. ' '  While  this 
is  true  in  a  great  many  cases,  still  it  is  a  risky  way  of 
doing  business.  The  merchant  forwards  his  goods,  per- 
haps consigned  to  his  own  order,  attaches  his  bills  of 
lading,  insurance  certificate  and  other  documents  that 
are  required  to  a  draft  which  is  made  upon  the  pur- 
chaser and  deposits  this  with  his  banker,  secure  in  the 
feeling  that  his  goods  will  not  be  delivered  to  the  pur- 
chaser unless  the  quid  pro  quo  is  duly  returned.  Should 
it  turn  out  that  the  buyer  is  not  reliable  and  the 
goods  are  withheld,  the  expense  of  taking  care  of  the 
merchandise  on  arrival,  the  vexatious  delays  and  annoy- 
ances and  the  sacrifice  that  he  will  have  to  submit  to  in 
disposing  of  the  goods,  unless  he  desires  to  throw  good 
money  after  the  bad  in  having  the  goods  returned,  will 
eat  up  his  profits.  It  is  easier  to  investigate  the  re- 
liability of  the  customer  before  filling  the  order. 

Granted  now  that  information  shows  a  foreign  buyer 
to  be  reliable  and  satisfactory,  what  methods  are  open 
to  the  credit  man  for  making  his  collections?  Three 
courses  are  open  to  him :  Draft  on  the  buyer  with  ship- 
ping documents  attached;  draft  on  a  bank  in  which  the 
buyer  has  a  deposit  or  credit,  and  a  ** clean"  draft. 

The  first  method  is  the  most  common,  and  is  the  safest, 
considering  its  simplicity.     When  goods  are  shipped  to 


108 THE    CREDITOR'S    POLICY ___^ 

the  buyer  in  a  foreign  country,  the  bill  of  lading  and 
other  shipping  documents  which  he  requires  before  the 
goods  can  be  delivered  to  him  by  the  transportation  com- 
pany are  attached  to  a  draft.  These  shipping  documents 
consist  of  bills  of  lading,  and  insurance  certificates,  in 
the  case  of  ordinary  manufactured  goods;  documents 
such  as  inspection  certificates,  are  required  where  cereals 
are  shipped;  in  shipments  of  meat  products,  inspection 
certificates,  generally  of  two  kinds,  are  required — board 
of  trade  certificates  of  inspection,  and  United  States  gov- 
ernment microscopical  certificates ;  in  shipments  to  some 
countries  where  a  differential  tariff  is  in  vogue,  certifi- 
cates of  origin  are  required. 

DIFFERENT  methods  open  to  the  shipper  in  foreign 
trade  for  making  collections — the  method  of  drawing 
drafts  on  buyers  and  attuching  the  shipping  documents. 

The  seller  sells  this  draft  with  document  attached  to 
his  local  bank,  and  is  paid  for  it  by  check  or  by  a  credit 
to  his  account.  The  bank  takes  no  risk,  for,  even  though 
the  buyer  does  not  pay,  it  has  possession  of  the  goods, 
and  can  even  hold  the  seller  for  the  amount.  The  banker 
forwards  the  draft  to  his  correspondent  abroad  in  the 
locality  of  the  buyer  for  collection.  The  buyer  cannot 
obtain  the  goods  until  he  honors  the  draft. 

Usually  the  goods  are  sold  on  time,  the  drafts  running 
for  sixty  or  ninety  days.  To  enable  the  purchaser  to  ob- 
tain possession  of  the  goods  in  the  event  of  a  sale,  or  if 
they  are  of  a  perishable  nature,  prior  to  the  maturity  of 
the  draft,  a  provision  is  made  to  the  effect  that  should 
it  be  desired,  the  purchaser  can  withdraw  the  goods  upon 
payment  of  the  draft  under  a  rebate  of  interest  at  a  cer- 
tain percentage — on  the  continent  generally  at  the  official 
rate  of  discount  of  the  state  bank  of  the  country. 


FOREIGN    CREDITS 109 

Even  with  this  seemingly  safe  method,  the  shipper 
should  exercise  every  precaution,  for  it  does  not  always 
protect  him.  The  goods  themselves  should  never  bear 
any  marks  or  address  by  which  the  consignee  could  in 
any  way  prove  they  were  intended  for  him,  and  thus 
claim  them  in  the  absence  of  the  bill  of  lading,  as  fre- 
quently happens  when  the  merchandise  arrives  at  des- 
tination before  the  draft  is  presented.  The  transporta- 
tion company's  agent  is  almost  always  under  the  influ- 
ence of  local  merchants,  and  his  standing  in  the  com- 
munity in  a  great  measure  depends  upon  their  good  will ; 
hence,  when  it  comes  to  favoring  any  one  where  there  is 
the  slightest  ambiguity  in  the  shipping  instructions,  it 
certainly  will  not  be  the  foreign  shipper.  If  the  pack- 
ages of  goods  have  to  be  marked,  it  should  be  with  the 
name  or  initials  of  the  shipper,  and  the  bills  of  lading 
themselves  should  always  read  that  the  goods  are  de- 
livered only  to  the  order  of  the  shipper.  These  remarks 
apply  chiefly  to  remote  points,  as  the  principal  European 
countries  are  subject  to  well-established  rules  and  regu- 
lations; but  notwithstanding  this,  considerable  laxity 
exists,  and  it  behooves  a  shipper  to  be  as  technical  as  pos- 
sible, as  it  is  always  on  technical  grounds  that  the  agents 
of  transportation  companies  claim  immunity. 

The  second  method  of  obtaining  payment  for  goods  is 
used  when  the  consignee  is  not  known  to  the  shipper  and 
the  latter  does  not  wish  to  take  the  risk  of  the  expense  of 
having  the  goods  returned  to  him  in  case  draft  is  not 
honored.  The  buyer  then  makes  a  deposit  with  some 
foreign  bank,  or,  if  he  is  favorably  known,  gets  a  credit 
for  a  certain  length  of  time.  The  bank  writes  to  the  sel- 
ler— and  often  also  to  the  seller's  bank — stating  that  the 
seller  can  draw  on  the  buyer  at  this  bank  for  a  certain 
length  of  time  up  to  a  specified  amount,  with  proper 


110 THE    CREDITOR*S    POLICY 

documents,  showing  that  goods  have  been  shipped,  at- 
tached to  the  draft.  The  seller  presents  this  letter  to 
liis  bank,  which  takes  up  his  draft  with  papers  attached 
and  makes  collection  from  the  foreign  bank.  In  this  case 
the  whole  risk  lies  with  the  foreign  bank. 

This  method  is  generally  used  in  trade  with  South 
America  and  countries  having  poor  banking  facilities  and 
poorer  credit.  Deposits  are  usually  made  or  credit  ob- 
tained by  the  buyer  in  a  London  bank  through  which 
drafts  can  most  easily  and  safely  be  drawn. 

Making  a  '* clean"  draft  on  a  customer  is  the  third 
method  open  to  the  seller.  This  is  identical  with  draw- 
ing sight  draft  on  a  domestic  debtor.  The  goods  are 
shipped  to  the  address  of  the  buyer  without  attachments. 
When  the  bill  falls  due,  the  seller  draws  on  the  buyer  for 
the  amount  of  the  shipment  through  his  local  bank,  which 
in  turn  collects  through  its  foreign  correspondent.  In 
this  case  the  seller  bears  all  the  risk.  It  is  used  only  in 
selling  to  accredited  foreign  agents  or  to  houses  whose 
credit  is  beyond  suspicion. 

The  credit  man  cannot  conduct  his  foreign  trade 
in  the  way  that  he  handles  his  domestic  business.  He 
must,  in  the  first  place,  exercise  the  utmost  care  in 
the  details.  He  must  handle  his  trade  with  each  coun- 
try differently,  according  to  its  laws  and  customs  and  its 
banking  facilities  and  standards  of  commercial  integrity. 

V^MORY  will  often  carry  for  years  the  genera  Hmpression 
^^■*-  of  *'good**  or  "had"  in  connection  with  a  name,  even 
though  that  name  in  the  meantime  has  never  been  brought 
to  mind.  But  it  is  unsafe  to  depend  on  memory  beyond 
that  point,  for  many  of  the  "good"  are  good  only  under  cer- 
tain  conditions,  and  very  few  are  good  regardless  of  conditions, 

— Dorchester  Mapes, 


PART  III-DET AILED 

CREDIT  AND  COLLECTION 

SYSTEMS 

The  Credit  Man 

/CREDIT   is   based    upon    confidence.     When 

credit  is  extended  it  must  be  upon  a  belief 

that  the  recipient  will  pay  when  the  account  is  due. 

The  credit  man  must,  therefore,  seek  constantly 
for  reasons  upon  which  to  base  this  confidence: 
for  "the  strength  of  the  credit  man  is  knowl- 
edge.'* He  must  be  constantly  alert  with  all  his 
faculties  at  concert  pitch,  as  careful  and  watchful 
as  the  paying  teller  of  a  bank :  for,  in  passing 
credits,  he  is  merely  paying  out  merchandise  in- 
stead of  currency. 

In  compiling  information  he  must  have  a 
thorough  system  for  arranging  and  analyzing  the 
facts  obtained  but,  more  important,  he  must  become 
skilled  and  expert  in  drawing  correct  conclusions 
and  inferences  from  his  knowledge  of  these  facts. 

The  credit  man  can  learn  in  various  ways  the 
chief  causes  of  failures.  The  path  of  safety  lies 
in  extending  credit  only  when  these  causes  are 
not  in  evidence  and  where  the  opposite  condi- 
tions maintain. 


F.  H.  McADOW 

Secyretary,  Staver  Carriage  Company 
Ex-Presidsnt,  The  National  Credit  Men's  Association 


XI 

HOW  A  WHOLESALE  HOUSE 
HANDLES  ITS  ACCOUNTS 

By  E.  F.  French 
Credit  Manager,  J.  V.  Farwell  &  Company 

SEVERAL  decades  of  business  building  have  resulted 
in  the  system  which  is  outlined  in  this  article.  It 
is  not  the  production  of  one  man,  but  the  result  of  the 
work  of  many,  and  has  been  modified  by  various  busi- 
ness conditions. 

One  important  feature  of  this  system  is  that  all  orders 
do  not  necessarily  pass  the  inspection  of  the  credit  de- 
partment. The  principle  observed  is  that,  since  seventy- 
five  per  cent  of  desirable  merchants  discount  all  pur- 
chases, and  are  perfectly  good  for  lines  of  credit  com- 
mensurate with  the  amount  of  capital  employed  in  their 
businessi,  it  is  unnecessary  for  these  accounts  to  be 
watched  carefully  by  the  credit  office,  but  only  accounts 
concerning  which  there  is  the  least  doubt,  or  upon  which 
there  is  the  least  stain,  require  the  observing  eye  of  the 
credit  manager  upon  them.  This  does  not  mean  that  all 
accounts  should  not  be  periodically  reviewed  and  re- 
vised by  the  credit  man,  nor  do  the  words  ' '  doubtful '  *  or 
** stain"  refer  only  to  large  factors,  but  to  the  slightest 
deviations  from  the  straight  and  narrow  path  of  busi- 
ness integrity.  By  eliminating  in  a  measure  such  de- 
sirable, discounting  accounts,  the  credit  department  is 
not  only  saved  a  great  deal  of  work,  but  is  given  time 
to  observe  closely  the   accounts  which  need  watching. 


114  CREDIT    SYSTEMS 


All  mail  for  the  house  is  received  and  opened  in  the 
cashier's  department;  only  remittance  letters  and  money, 
however,  are  retained  in  this  department.  The  balance 
of  the  mail,  including  orders,  is  immediately  sent  to  the 
credit  department,  where  it  is  separated.  The  orders, 
being  the  most  important  feature,  are  promptly  dis- 
tributed by  clerks  to  the  bookkeeper's  department,  where 
they  are  separated  by  the  various  bookkeepers  accord- 
ing to  the  desirability  of  the  customer.  The  orders  from 
those  whose  accounts  are  in  good  condition  and  who  have 
liberal  lines  of  credit  (according  to  characters  noted  on 
eaxjh  account)  are  turned  over  to  the  salesmen,  after 
having  the  time  received  stamped  upon  them,  without 
going  to  the  credit  office.  Upon  all  doubtful  and  new 
accounts  there  is  a  slip  showing  the  condition  of  the  ac- 
count and  line  of  credit.  These  orders  only  are  referred 
to  the  credit  office. 

PROMPTNESS  is  required  in  handling  orders  from 
new  customers;  a  complete   and  detailed  system  in 
actual  operation  for  handling  new  credit  accounts. 

There  should  be  as  little  delay  as  possible  in  filling 
new  orders.  Promptness  in  executing  the  first  order  dis- 
poses the  merchant  to  repeat  his  orders,  thereby  in- 
creasing the  account.  A  large  percentage  of  orders  can 
be  turned  over  to  the  sales  department,  upon  the  high 
rating  of  the  merchant  in  the  various  mercantile  agency 
books,  while  the  usual  investigation  can  be  made  later. 
If,  however,  the  book  rating  is  in  the  least  unsatisfac- 
tory, the  order  is  retained  until  special  reports  are  ob- 
tained, and  if  such  information  is  in  the  least  conflicting 
or  unfavorable  the  order  is  still  kept  until  all  references 
and  replies  to  inquiries  from  correspondents  are  re- 
ceived. 


^ WHOLESALE    ACCOUNTS 115 

If  the  volume  of  information  is  not  altogether  satis- 
factory, the  customer  is  written  direct  for  a  statement 
of  his  financial  affairs,  a  guarantee  covering  his  pur- 
chases, or  a  remittance  covering  the  amount  of  the  order. 
Inasmuch  as  a  large  percentage  of  orders  are  now  taken 
by  traveling  salesmen,  several  months  prior  to  date  of 
shipment,  and,  if  from  a  new  customer,  are  accompanied 
with  report  blanks  giving  the  customer's  references  as 
well  as  the  salesman 's  impressions,  the  credit  department 
has  ample  time  in  which  to  make  the  investigation  before 
the  date  of  shipment.  But  in  order  that  no  mistakes 
may  be  made  on  account  of  filling  orders  which  will  not 
be  shipped  promptly,  a  memorandum  of  the  estimated 
amount  of  all  orders  for  future  shipment  is  sent  to  the 
credit  department  just  prior  to  the  filling  of  such  orders. 
In  this  way  the  house  will  not  be  put  to  the  expense  of 
filling  the  order  unless  the  goods  are  to  be  shipped. 

When  a  new  account  has  been  passed  upon  and  ap- 
proved, a  special  sheet  is  made  for  it  by  the  stenographer 
(this  house  uses  the  loose-leaf  ledger  system)  and  upon 
this  sheet  is  inserted,  in  characters,  the  classification  and 
line  of  credit,  as  well  as  terms  and  name  of  the  general 
salesman.  The  classification  indicates  the  desirability  of 
the  account.  For  the  benefit  of  the  traveling  salesman, 
this  classification  is  inserted  in  the  road  salesman's 
credit  guide,  which  will  be  hereafter  mentioned.  The 
line  of  credit  is  the  amount  of  credit  given  by  the  credit 
manager,  based  upon  information  he  has  received,  the 
character  and  general  condition  of  the  customer,  how 
much  confidence  can  be  placed  in  him,  and  so  on.  If  a 
customer's  business  is  in  a  good  healthy  condition  and  if, 
for*  instance,  he  has  a  capital  of  $10,000,  all  in  his  busi- 
ness, he  is  entitled  to  a  given  line  of  credit,  although  it 
is  often  increased,  according  to  the  extent  to  which  he 


116 CREDIT    SYSTEMS 

confines  his  purchases  to  the  company,  and  the  prompt- 
ness with  which  he  meets  his  obligations.  This  in- 
creased line  is  usually  determined  by  the  amount  of  busi- 
ness he  is  doing,  and  similar  considerations.  A  custo- 
mer with  a  stock  of  $10,000,  and  doing  a  business  of 
$30,000,  is  entitled  to  a  larger  line  of  credit  than  a  cus- 
tomer with  the  same  amount  of  capital  and  doing  a  busi- 
ness of  only  $15,000  to  $20,000.  Statistics  show  that  if 
in  this  line  of  business  a  merchant  does  not  turn  his 
stock  at  least  twice  annually,  he  is  not  making  any 
money. 

Using  the  original  ledgers  instead  of  collection  books 
is  preferable,  in  that  the  condition  of  the  customer's  ac- 
count may  be  quickly  noted,  together  with  payments,  so 
that  the  amount  past  due  may  be  treated  accordingly ;  in 
fact,  payments,  slow  or  prompt,  are  the  best  indicators  of 
a  customer's  condition.  Every  ten  days  the  credit  man- 
ager receives  from  the  bookkeeper  all  ledgers,  with  slips 
projecting  where  there  is  an  amount  past  due.  This 
keeps  the  credit  man  in  the  closest  touch  with  his  cus- 
tomers and  gives  him  a  knowledge  of  their  condition 
which  cannot  be  obtained  in  any  other  way.  It  is  often 
said  in  credit  circles  that  a  strenuous  collection  depart- 
ment obviates  the  necessity  for  a  particularly  able  credit 
department.  It  can  be  just  as  positively  asserted  that 
an  able  credit  department  avoids  the  necessity  for  an  ex- 
tremely capable  collection  department.  It  is  to  the  latter 
idea  that  this  system  leans,  although  collections  are  by 
no  means  neglected. 

Now  let  us  take  up  an  order  from  an  old  customer, 
which  has  been  received  by  the  bookkeeping  department. 
In  the  first  place,  the  bookkeeper  refers  to  the  ledger. 
If  there  is  nothing  past  due  and  the  indebtedness  is 
within  the  line  of  credit  noted  in  the  ledger,  the  order 


WHOLESALE    ACCOUNTS 117 

is  immediately  sent  to  the  general  salesman  to  be  filled. 
After  it  is  filled,  however,  and  ready  for  shipment,  a 
shipping  ticket  is  sent  to  the  credit  department  for  its 
0.  K.  In  this  way,  no  order  really  goes  out  of  the 
house  without  coming  under  the  eyes  of  the  credit  man- 
ager. In  case  an  order  is  received  from  a  customer 
whose  account  is  not  in  a  satisfactory  condition  or  whose 
rating  is  below  the  rank  which  entitles  him  to  be  called 
good,  or  which  is  too  large  for  the  bookkeeping  depart- 
ment to  pass  upon  on  its  own  responsibility,  then  a 
ticket  is  attached  by  the  bookkeeper,  upon  which  is  noted 
the  condition  of  the  account,  last  payment,  line  of  credit, 
and  so  on,  in  order  that  the  credit  manager  may  decide 
promptly  as  to  whether  or  not  the  order  shall  be  filled. 
The  order  is  then  referred  to  the  credit  manager  for  ap- 
proval. Often,  in  cases  of  this  kind,  new  information 
and  a  new  financial  statement  are  necessary. 

HOW  'periodic  revisions  of  customers*  credit  ratings 
are  made;  filing  the  customers*  reports;  how  travels 
ers*  credit  guides  save  time  and  expense. 

A  revision  of  credit  lines  on  all  customers  is  made 
periodically  and  the  lines  are  raised  or  lowered,  accord- 
ing to  changes  of  the  customer's  commercial  rating  and 
his  promptness  in  meeting  his  obligations. 

All  credit  information  is  filed  in  separate  envelopes, 
on  which  is  written  a  brief  synopsis  of  the  customer's 
condition,  line  of  credit  and  other  general  information,  to 
avoid  the  necessity  of  the  credit  man  going  through  the 
entire  mass  of  information. 

Each  of  the  traveling  salesmen  for  this  company  is 
furnished  with  a  traveler's  credit  guide.  This  has  been 
found  indispensable,  for  it  not  only  saves  an  enormous 
annual  expense  to  the  company,  but  the  time  of  the 


118 CREDIT    SYSTEMS 

traveling  salesman.  This  guide  keeps  each  salesman 
thoroughly  posted  as  to  the  credit  condition  of  all  mer- 
chants he  anticipates  visiting  and  in  this  book  the  classi- 
fications noted  in  the  ledger  are  inserted.  These  classi- 
fications fluctuate  according  to  the  desirability  of  the 
account,  based  on  responsibility  and  payments. 

In  case  of  the  inability  of  the  credit  department  to 
collect  an  amount  past  due,  after  mailing  statements, 
writing  letters  and  making  drafts,  or  where  a  merchant 
is  in  financial  difficulty,  the  account  is  transferred  to 
what  is  termed  the  *' docket  ledger"  (also  the  loose-leaf 
ledger  system)  and  a  sheet  made,  upon  which  is  inserted 
the  reason  why  the  account  is  placed  on  the  docket  as 
well  as  a  synopsis  of  all  correspondence  after  the  transfer 
is  made.  This  docket  is  carefully  watched  by  the  com- 
pany's attorney  and  his  assistant. 

The  essential  points  in  this  system  are :  Full  and  satis- 
factory initial  information,  frequent  revision  of  in- 
formation, closest  watch  on  doubtful  customers  and  over- 
due accounts,  prompt  and  strict  collections,  economy  of 
time  in  the  credit  department,  and  avoidance  of  delay  in 
filling  and  shipping  orders. 


Ct] 


CLOW  PAYERS"  are  especially  troublesome.  The  credit 
^  man  may  know  them  to  be  perfectly  good  and  safe,  but 
because  of  carelessness  or  because  they  are  chronically  slow, 
they  are  forever  letting  their  bills  get  overdue.  The  credit  man 
must  work  with  these  men  personally,  educating  and  training 
them  to  proper  business  methods  even  to  the  extent  of  coercion 
and  threats  when  friendly  methods  fail. 

— Harlow  N.  Higinbctham 

President,  The  National  Grocer  Company 
Formerly  Credit  Manager,  Marshall  Field  and  Company 


XII 

HOW  A  MANUFACTURER 
HANDLES  HIS  ACCOUNTS 

By  Alfred  Terrell 
Secretary,  The  Simmons  Manufacturing  Company 

LACK  of  judgment  and  carelessness  are  the  two  chief 
causes  of  a  high  percentage  of  losses  from  bad  debts 
in  a  firm's  accounts.  From  this  it  follows  that  the  re- 
quisites of  a  good  credit  system  are:  first,  the  pre- 
vention of  poor  judgments  by  bringing  before  the  credit 
man,  to  aid  him  in  his  determination  of  credit  extension, 
the  fullest  possible  information  regarding  applicants; 
and,  second,  the  eradication  of  carelessness  by  keeping 
before  the  credit  man  at  all  times  the  details  regarding 
customers'  accounts,  and  by  warning  him  automatically 
when  an  account  becomes  dangerous  or  a  customer 
doubtful. 

The  point  Yxas  been  emphasized  that  the  credit  man 
should  not  be  so  overwhelmed  with  petty  work  that  no 
time  is  left  him  for  thought  and  study ;  his  system,  there- 
fore, should  take  care  of  the  routine  and  attend  to  the 
details  of  the  credit  department  mechanically  without  re- 
quiring his  attention,  leaving  his  mind  free  for  the 
weightier  affairs  of  his  position.  The  system  should  de- 
lay orders  as  little  as  possible  in  their  passage  through 
the  credit  department,  and  information  or  records  neces- 
sary for  the  determination  of  an  extension  of  credit 
should  be  at  hand. 

The  system  here  described  is  in  practical  operation  in 


120  CREDIT    SYSTEMS 


a  manufacturing  house,  which,  like  most  establishments 
of  its  kind  to-day,  sells  both  to  jobbers  and  retailers,  so 
that  it  is  equally  applicable  to  either  a  manufacturing 
or  wholesale  business.  The  house  which  uses  it  shows  a 
percentage  of  loss  of  seventy-three  thousandths  of  one 
per  cent  on  the  total  amount  of  business  done — consider- 
ably less  than  one-tenth  of  one  per  cent. 

HOW  orders  from  customers  come  up  to  the  credit  de-  ' 

partment — the  advantage  to  the  credit  man  of  keeping 
in   touch    with    the   customers'   general  correspondence. 

All  the  mail  entering  the  house  is  opened  by  a  mailing 
clerk.  This  clerk  marks  on  the  letter  the  index  nimiber 
of  its  writer.  Each  correspondent  of  the  house  and  each 
firm  or  individual  who  does  any  business  with  it  is  given 
an  index  number,  which  is  consecutive,  one  series  for 
each  state.  Thus,  the  number  of  John  Jones,  who  lives 
in  Peoria,  will  be  Illinois  126;  that  of  Will  Brown, 
who  lives  in  Des  Moines,  is  Iowa  489.  This  number 
is  used  in  all  the  filing  done.  The  correspondence  is 
filed  numerically  under  the  states  by  these  numbers ;  they 
are  used  as  the  numbers  of  the  ledger  accounts  of  the 
customers;  orders  are  filed  according  to  them;  mercan- 
tile and  other  reports  are  classified  likewise.  An  alpha- 
betical index  of  all  customers  is  kept,  so  that,  when  a 
man's  name  but  not  his  number  is  known,  the  latter  can 
immediately  be  found.  Everything  else  is  filed  accord- 
ing to  his  number. 

The  letters  given  their  proper  number  by  the  mailing 
clerk,  all  the  correspondence  passes  to  the  credit  man  for 
distribution.  Why  to  him  instead  of,  as  is  the  usual  cus- 
tom, to  the  secretary  of  the  firm  or  to  some  clerk?  Be- 
cause the  credit  man,  more  than  any  other  responsible 
head  of  the  house,  must  keep  in  touch  with  the  affairs 


MANUFACTURER'S    ACCOUNTS 


121 


of  the  house.  He  can  thus  keep  absolute  track  of  col- 
lections when  they  come  in,  without  having  to  get  a  re- 
port from  the  bookkeeping  department  every  day ;  he  can 
see  who  is  taking  advantage  of  discounts,  and  the  drafts 
which  are  returned — a  very  important  fact  for  the 
credit  man's  store  of  knowledge;  he  can  keep  in  touch 
with  the  sales  and  the  other  departments  without  any 
special  work  or  reports;  the  things  he  can  pick  up  in 
the  general  correspondence — inquiries,  complaints,  ob- 
jections to  certain  prices  and  charges — afford  a  more 
enlightening  source  for  general  opinion  of  a  customer's 


RATINGS                       NAME                                                                                                          NO. 

ADDRESS 

EXPLANATORY 

DATE 

DESC'TIVE 

TERMS  Be.N. 

CHARGES 

O.C 

credits    9 

■ 

■ 

1  II 

1  1 

i      II 

8 

1 

JJJ 

1 — Lil 

Jli 

FORM  I:    The  ledger  card.     The  distinctive  feature  of  this  card  is  the 

space  for  a  note  giving  the  credit  man  at  a  glance  an  idea  of  the  character 

and  condition  of  the  customer 


attitude  and  desirability  than  is  usually  appreciated. 
In  short,  the  credit  man  can  thus  keep  his  finger  on  the 
pulse  of  the  business ;  can  notice  every  little  change ;  can 
feel  every  movement,  the  vital,  the  vibrating  actuality. 


122 CREDIT    SYSTEMS 

The  credit  man  does  not  classify  the  mail  first,  dis- 
tribute it,  and  then  go  back  to  pass  judgment  on  his 
orders.  He  does  his  own  work  as  he  goes  along.  It  may 
seem  that  this  would  retard  the  course  of  the  mail  and 
keep  it  too  long  from  its  ultimate  destination  in  the 
office.  But  the  system  prevents  this.  In  the  great  ma- 
jority of  cases  the  credit  man  need  but  glance  at  an 
order  to  determine  whether  he  can  let  it  pass;  his  con- 
stant contact  with  remittances  and  general  correspond- 
ence through  his  handling  the  mail  just  described,  his 
relation  to  the  collection  department,  and  his  periodical 
revision  of  all  his  information  regarding  customers,  to  be 
described  later,  bring  to  his  mind  the  instant  he  sees  a 
customer's  name  the  condition  of  his  account.  He  need 
not  know  all  the  details  of  the  special  report  which  he 
may  have  received  from  one  or  more  of  the  agencies ;  all 
he  needs  to  remember  is :  Did  I  determine  that  this  man 
was  good  when  I  studied  his  report?  What  is  the  pres- 
ent condition  of  his  account?  Does  he  owe  anything? 
Are  any  of  his  bills  overdue  ?  And  is  this  the  usual  size 
of  his  order? 

If  he  knows  these  facts,  and  they  are  favorable,  he  is 
safe  in  granting  the  credit  desired  in  the  order.  If  he 
is  in  the  least  doubt  as  to  his  customer's  account,  that 
is,  if  he  is  not  sure  of  this  information,  or  if  the  cus- 
tomer's account,  as  he  remembers  it,  is  not  in  good  con- 
dition, let  him  wait.  Hoyle's  famous  rule  may  be  para- 
phrased for  the  credit  man  to  read:  *'When  in  doubt, 
get  more  information." 

But  how,  the  question  comes,  can  the  system  make  a 
man  obey  this  rule?  How  can  the  system  influence  a 
credit  man  to  wait  and  get  more  information?  Is  not 
that  a  matter  of  judgment  or  of  will  ?  The  system  helps 
and  trains  him  to  wait,  because  it  makes  the  acquisition 


MANUFACTURER'S    ACCOUNTS 


123 


of  more  information  easy,  almost  automatic.  When  the 
credit  man  feels  doubt  or  suspicion  regarding  any  ac- 
count, he  lays  the  order  to  one  side.  An  office  boy, 
knowing  that  orders  lying  in  that  place  are  to  have  the 
accounts  of  their  senders  investigated,  takes  the  letter  or 
order,  finds  on  it  the  index  number,  goes  to  the  ledger 
file — the  card  system  of  ledgers  is  used  with  this  system 
— picks  out  the  proper  card  and  brings  it  to  the  credit 
man. 

When  the  credit  man  has  finished  distributing  the  cor- 
respondence, this  little  pile  of  orders  with  the  ledger 


FORM  II:     The  folder  in  which  all  reports  and  information  concerning 

customers  are  filed.     When  orders  are  received  from  a  new  customer  this 

folder  is  sent  with  the  order  to  the  credit  man 

cards  is  ready  for  his  consideration.  The  necessity  for 
the  credit  department  being  the  head  of  the  whole  office 
department,  and  so  in  control  of  the  policy  and  methods 
of  the  bookkeeping  department  as  well  as  of  its  more 


124    CREDIT    SYSTEMS 

immediate  department,  is  here  evidenced.  Were  the  old 
bound  book  ledgers  used,  this  system  would  be  well  nigh 
impossible,  wholly  impossible  in  a  large  business  where 
the  ledgers  must  be  in  constant  use  in  the  bookkeeping 
department.  But  the  taking  out  of  a  card  here  and  there 
by  the  credit  man  for  his  use  does  not  discommode  the 
bookkeeping  department 's  work,  and  the  account  wanted 
can  be  placed  directly  before  the  credit  man  and  handled 
by  him  with  infinitely  more  ease  and  dispatch. 

On  this  ledger  card  are  the  usual  debit  and  credit 
entries,  enabling  the  credit  man  to  see  at  once  the  con- 
dition of  the  customer's  account,  terms  on  which  goods 
are  sold  him,  and  his  rating.  But  the  distinctive  thing 
about  this  card  is  a  brief,  written  on  a  space  provided  on 
the  most  conspicuous  part  of  the  card,  of  the  character 
and  condition  of  the  man,  as  abstracted  from  the  vari- 
ous reports  and  other  sources  of  information  gathered 
regarding  him.  This  brief  contains  the  meat  of  the  mer- 
cantile, attorney  and  personal  reports;  it  is  revised  con- 
stantly as  new  information  comes  in,  and  obviates  any 
reference  to  the  long  drawn  out  and  rehashed  mercantile 
reports.  This  card  will  tell  the  credit  man  at  a  glance 
whether  the  customer  is  worthy  of  further  credit. 

These  briefs  are  compiled  by  the  credit  man  himself. 
When  a  report  is  received  on  a  new  customer,  a  brief  is 
made  out  and  written  on  a  small  card.  This  is  placed, 
together  with  the  report  itself,  in  a  folder,  upon  which 
is  entered  the  name,  the  index  number  and  the  rating 
and  reports  of  the  customer.  It  is  then  passed  on  to 
the  bookkeeping  department,  where  a  ledger  card  is  made 
out  for  this  man  and  the  brief  copied  on  it.  The  folder 
with  the  card  and  reports  is  filed  in  a  report  case  in  its 
numerical  order.  As  new  reports  and  information  come 
in,  the  brief  is  revised. 


MANUFACTURER'S    ACCOUNTS 125 

It  might  seem  convenient  for  the  credit  man  to  have 
these  small  card  briefs  filed  in  a  little  case  on  his  desk 
instead  of  with  the  reports  themselves,  so  that  he  could 
refer  to  them  quickly  without  having  to  go  to  the  ledger 
card.  But  this  is  the  very  thing  which  would  encourage 
carelessness.  Not  having  on  this  card  the  statement  and 
history  of  the  customer's  account  with  the  house,  at  least 
equal  to  the  brief  in  importance,  the  credit  man  would 
be  tempted  to  jump  at  his  conclusions,  having  only  half 
the  needed  information  at  hand,  and  guessing  at  the 
rest.  And  guessing,  in  a  credit  department,  is  no  less 
than  criminal. 

METHODS  used  in  passing  judgment  on  doubtful 
orders — a  complete  plan  for  securing  the  greatest 
degree  of  speed  and  accuracy  in  handling  this  work. 

In  going  through  his  orders,  however,  the  credit  man 
may  come  across  one  whose  determination  demands  that 
he  have  more  information  regarding  the  customer  than 
merely  the  brief  on  the  ledger.  This  order  he  then  throws 
into  a  designated  pigeonhole  and  his  clerk,,  knowing 
that  the  folder  containing  the  full  reports  and  informa- 
tion on  this  man  are  wanted,  in  addition  to  the  ledger 
card,  will  get  both  and  lay  them  before  the  credit  man. 
Further  than  this,  the  credit  man  may  desire  an  entirely 
new,  report  on  a  customer.  He  then  takes  the  folder, 
such  as  is  shown  in  Form  II,  marking  under  "Reports" 
from  what  agency  or  what  sources  he  desires  the  report 
to  be  obtained.  The  clerk  will  immediately  take  this  and 
send  to  the  proper  place  for  reports.  All  orders  which 
are  being  thus  held  for  information  are  placed  together 
and  the  credit  man  goes  through  them  every  day,  so  that 
none  will  be  overlooked  and  delayed  any  longer  than  is 
necessary. 


126 CREDIT    SYSTEMS 

A  credit  mcjn.  will  often  be  sufficiently  secure  regard- 
ing an  account  to  send  out  the  order,  and  still  think  it 
advisable  to  get  further  information  in  order  to  be  fore- 
armed. In  this  case  he  passes  the  order  through,  but 
marks  on  a  folder  as  before  the  report  wanted,  and  the 
clerk  goes  through  the  same  process  as  for  the  preceding 
case.  Instead  of  putting  these  folders  with  the  pile  re- 
quiring daily  attention,  they  are  placed  in  another 
pigeonhole  to  await  the  information  sought. 

This  latter  process  applies  especially  to  first  orders 
from  new  customers.  The  clerk  who  opens  the  mail  can 
recognize  the  first  order,  since  the  man  sending  it  will 
have  no  index  number.  Such  orders  do  not  go  with  the 
general  mail  to  the  credit  man's  desk,  but  go  immedi- 
ately to  his  clerk,  who  makes  out  for  the  new  order  index 
and  ledger  cards  and  a  report  folder,  writing  on  the 
cover  not  only  the  name  and  address  of  the  new  cus- 
tomer, but  also  the  rating  given  by  the  mercantile 
agencies,  which  he  immediately  looks  up.  These  folders 
then  come  to  the  credit  man.  Very  often  he  decides 
from  the  ratings  that  he  can  venture  sending  the  order 
at  once,  taking  his  leisure  to  look  up  the  new  man  or 
firm  in  detail.  This  he  will  do  only  when  the  ratings 
are  good  and  identical,  a  very  significant  consideration, 
for  if  the  ratings  are  not  the  same,  not  only  is  one  bound 
to  be  more  unfavorable  than  the  other,  but  it  shows  that 
the  agency  having  the  poorer  rating  has  some  informa- 
tion that  is  of  prime  importance  to  the  credit  man.  As 
a  rule,  in  such  a  case,  he  will  hold  the  order  for  more 
complete  reports. 

The  regular  ledger  cards  are  white.  Two  other  shades 
are  used  to  indicate  specific  conditions.  When  for  any 
reason,  such  as  payments  becoming  slow  or  local  or  gen- 
eral financial  conditions  adverse,  an  order  is  refused, 


MANUFACTURER'S    ACCOUNTS 


127 


the  white  card  is  immediately  taken  out  of  the  ledger 
case,  and  a  blue  card,  with  the  identical  figures  and  in- 
formation on  it  as  the  white  card,  is  substituted.  This 
shows  to  the  credit  department  forever  after  that  this 
man  at  one  time  or  another  was  in  such  a  poor  condition 
that  he  was  refused  credit. 

In  the  same  way,  when  an  account  against  a  customer 
has  once  been  passed  up — placed  in  the  hands  of  an  at- 
torney— a  red  card  is  substituted  for  the  original  white 
ledger  card,  and  always  remains  in  the  ledger  case,  even 
though  an  account  is  again  opened  with  the  customer. 
It  constantly  warns  the  credit  man  that  once  he  had 


OATC  or  voun  onoen 


DATC  OROCR  flECEIVEO 


VOU R  O ROER  NO.     SOLD  TO 


THELSfMMONS  MFG.  CO. 

19a  MICHIQAN  AVENUE 


EXPLANATORV 


CATALOeUC  NUMBER.  SIZE  ANDOKBCRimON 


INDIVIDUAL  NO. 


DATE   SHIPPED. 


OUR  ORDER  NO. 
TERMS 

3S  DKYS  NET 


AMOUNT         NET 


FORM  III:     The  order  blank.    Four  manifold  copies  are  made  out.    The 
copy  here  reproduced  goes  to  the  collection  department  and  shows  the  per- 
forated end  which  serves  as  a  tickler 


trouble  with  this  man  and  was  on  the  verge  of  a  loss 
through  him,  and  the  card  stands  as  a  perpetual  warn- 
ing. 

No  stain  or  smirch  is  harder  to  eradicate  than  one  on 
a  man's  commercial  reputation;  a  fall,  even  a  stumble 
or  slight  waywardness,  is  always  remembered,  not  neces- 
sarily against  him,  but  about  him,  by  the  careful  credit 
man,  and  rightly.     A  man  who  has  once  shown  insta- 


128     CREDIT    SYSTEMS 

bility,  who  has  once  completely  failed,  has  shown  that 
there  is  some  weakness  in  him;  something  constant  and 
permanent  produced  that  weakness,  whether  it  was  in 
his  character,  his  ability,  his  amount  of  capital,  or  in 
his  location;  very  rarely  does  it  happen  that  it  wast 
merely  transient,  although  there  are,  of  course,  excep- 
tions. Once  a  man's  account  is  upon  such  a  blue  or  red 
card,  although  he  may  come  to  have  it  entered  upon  his 
brief  that  he  has  completely  recovered  and  is  now  per- 
fectly sound  and  trustworthy,  still  always  will  his  former 
weakness  be  brought  to  the  attention  of  the  credit  man. 
The  order  0.  K'd  by  the  credit  man,  it  goes  to  the 
invoice  clerk.  He  makes  four  carbon  copies  of  the  order 
on  the  machine.  The  first  one,  called  the  quad  sheet, 
goes  to  the  collection  department;  the  second  serves  as 
the  bill  which  is  sent  to  the  customer ;  the  two  others  go 
to  the  warehouse  for  the  filling  of  the  order.  When  the 
order  is  filled,  one  is  kept  at  the  warehouse  as  its  record 
and  receipt  of  the  goods  shipped;  the  other  is  sent  back 
and  serves  as  the  source  from  which  to  post  the  ledger 
The  first  and  second  copies,  which  have  been  held  by  the 
billing  clerk  pending  the  shipment  of  the  goods,  are 
sent  to  their  destinations.  The  one  which  goes  to  the 
collection  department  is  divided  into  two  parts  by  a 
perforated  line,  so  that  the  part  containing  entry  of 
the  individual  order  number,  the  date  shipped,  the  order 
number,  the  terms  and  the  amount  of  the  invoice  can 
be  torn  oft*.  This  end  which  is  torn  oft  serves  as  the 
collection  department's  tickler;  the  remaining  part  of 
h  e  bill  is  filed  in  its  numerical  order  for  convenience 
in  reference. 

Suppose  this  order  was  shipped  on  March  1st,  and 
the  terms  are  thirty  days  net.  The  quad  will  be  filed  in 
the  tickler  thirty  days  ahead.  On  the  1st  of  April,  there- 


MANUFACTURER'S    ACCOUNTS 129 

fore,  it  will  come  to  the  attention  of  the  statement  clerk 
in  charge  of  the  tickler.  He  looks  up  the  ledger  account 
of  the  customer,  and  if  he  finds  the  bill  is  unpaid,  he 
will  send  a  statement  of  the  account,  which  is  made  in 
duplicate.  The  original  is  mailed  to  the  customer  and 
the  duplicate  is  put  over  for  ten  days.  A  stamp  is  used 
on  the  statement  sent  out,  inviting  the  dealer  to  remit 
by  New  York  or  Chicago  draft,  as  the  banks  charge  ex- 
change on  local  checks,  and  saying  that  should  the  firm 
not  receive  prompt  remittance,  the  credit  man  would 
presume  that  the  customer  wanted  him  to  make  a  sight 
draft. 

On  the  20th,  if  the  ledger  accounts  show  no  remittance, 
draft  is  made.  The  draft  is  filled  out  in  duplicate ;  the 
duplicate  is  sent  to  the  bank  through  which  draft  is 
made;  the  original  is  kept  for  filing  in  the  tickler,  ten 
days  ahead. 

If  the  draft  is  returned  dishonored,  the  account  passes 
into  the  hands  of  the  collection  manager,  who  is  very 
often  the  credit  man  himself.  He  usually  enters  into 
correspondence  with  the  debtor,  attempting  to  place  the 
matter  before  him  in  such  a  light  that  no  more  extreme 
methods  will  have  to  be  resorted  to.  Often,  when  an 
account  has  reached  this  stage,  orders  are  held  up  until 
some  kind  of  satisfaction  is  secured.  In  this  correspond- 
ence the  debtor  is  always  urged  to  offer  some  satisfac- 
tion, some  form  of  settlement,  however  slow  it  may  be ; 
to  unburden  himself  to  such  an  extent  that  the  house 
may  know  where  it  is  at  regarding  the  account.  A  very 
efficacious  method  in  extreme  cases  is  to  telegraph  rather 
sharply  immediately  upon  return  of  a  draft,  expressing 
surprise  at  the  dishonor  of  the  draft  and  demanding  im- 
mediate remittance.  This  will,  in  the  majority  of  cases, 
bring  payment.    If  it  does  not,  after  one  or  two  letters. 


130 CREDIT    SYSTEMS 

another  telegram,  very  sharp  this  time,  will  be  likely 
to  bring  something.  The  main  thing  in  these  collection 
methods  is  to  seek  to  impress  the  doubtful  debtor  that 
the  house  is  watching  its  accounts  sharply ;  that  it  wants 
its  money  when  due;  that  it  is  bent  on  doing  business 
on  a  business-like  basis. 

COLLECTIONS  that  have  reached  the  legal  phases- 
how  these  accounts  are  designated  on  the  ledger  cards; 
methods  that  insure  command  of  collection  work. 

If  no  satisfaction  can  be  secured  through  specific 
means,  forcible  legal  methods  must  be  resorted  to.  Be- 
fore any  legal  steps  are  taken  concerning  an  account, 
the  matter  is  referred  to  the  credit  man,  and  is  left  in 
his  hands.  He  may  make  a  further  effort  to  secure  pay- 
ment through  peaceable  means,  or  may  at  once  hand  the 
account  to  an  attorney  for  collection. 

When  an  account  has  been  placed  in  the  hands  of  an 
attorney,  a  red  ledger  card  is  at  once  made  out  for  the 
debtor,  and  the  balance  of  his  account  is  entered  in  a 
suspense  account.  At  the  end  of  each  year  the  balance 
on  the  suspense  account  is  examined  and  an  estimate 
made  of  the  probable  percentage  of  collections  to  be 
obtained.  Thus,  if  the  credit  man  thinks  that  twenty- 
five  per  cent  of  the  claims  in  the  suspense  account  are 
collectible,  seventy-five  per  cent  are  entered  in  the  profit 
and  loss  account  for  the  year ;  the  other  twenty-five  are 
left  in  the  suspense  account.  Whenever  a  collection  is 
made  in  this  account,  it  is  credited  to  it.  The  object 
of  this  suspense  account  is  to  keep  bad  debts  off  the 
books,  without,  at  the  same  time,  charging  them  into  the 
profit  and  loss  account  at  once,  and  so  necessitating  the 
opening  of  that  account  in  the  course  of  the  fiscal  year, 
a  procedure  replete  in  possibilities  of  errors. 


MANUFACTURER'S    ACCOUNTS  131 

It  is  thus  apparent  how  the  credit  man,  through  his 
connection  with  the  collection  department,  which  reports 
to  him  all  accounts  overdue  more  than  thirty  days,  and 
also  all  accounts  on  which  drafts  have  been  dishonored, 
keeps  in  touch  with  delinquent  accounts.  His  informa- 
tion is  rendered  still  more  accurate  from  the  fact  that 
he  handles  the  remittances  in  the  mail  and  examines 
many  accounts  in  the  course  of  a  month. 

In  the  particular  business  in  which  this  house  is  en- 
gaged, most  of  the  heavy  buying  is  done  at  two  distinct 
periods  of  the  year.  Just  before  these  buying  periods 
come  around  the  credit  man  goes  over  all  his  accounts 
and  the  reports  on  all  his  customers  and  revises  them, 
getting  fresh  information  and  reports  in  all  cases  where 
it  appears  in  the  least  necessary.  In  some  few  cases, 
of  houses  on  such  a  firm  foundation  and  reputation  that 
their  commercial  honor  is  positively  unassailable,  it 
would  be  a  waste  of  time  and  energy  to  get  fresh  reports. 
In  other  cases  reports  may  have  been  obtained  only  a 
short  time  ago,  and  so  will  serve  for  the  coming  season. 
The  semi-annual  revision  gives  the  credit  man  a  new 
hold  on  his  accounts  and  a  clear  survey. 

It  is  true  that  this  system  alone  cannot  make  a  credit 
man ;  nor  can  it  make  a  very  careless  credit  man  entirely 
careful.  The  credit  man  must  do  his  share;  the  sys- 
tem will  meet  him  more  than  half  way;  in  fact,  will 
educate  him  into  careful,  conservative  habits. 

Every  man  must  face  some  losses;  he  cannot  escape 
them  if  he  does  his  duty  by  the  sales  end  of  the  busi- 
ness. In  describing  this  system,  it  should  not  be  under- 
stood that  the  taking  of  no  chances  at  all  is  advised. 
Such  a  course  would  be.  as  bad  as  being  too  free  with 
credit;  but  if  the  credit  man  does  take  chances,  by 
proper  judgment  in  picjiing  his  chances  and  by  proper 


132 CREDIT    SYSTEMS 

carefulness  in  setting  the  terms  on  which  he  takes  them 
and  the  guards  he  puts  about  them,  he  can  reduce  his 
chances  almost  to  certainties. 

In  this  connection,  the  credit  man  should  remember 
that  in  carrying  out  any  system  for  handling  credits 
and  collections,  his  ultimate  worth  is  measured  by  the 
quantity  as  well  as  by  the  quality  of  the  business  he 
accepts.  Back  of  every  system  is  the  personal  element, 
the  guiding  policy  which  must  be  kept  constantly  in 
mind.  A  system  can  do  much  in  itself,  but,  if  it  is  to  be 
a  help  instead  of  a  burden,  it  must  be  carefully  adapted 
to  the  purpose  and  policy  of  the  business. 


^ 


Tj^REQUENTLY  the  credit  man  must  take  an  axstive  interest 
*-  in  the  business  of  some  customer  who  has  met  misfortune. 
It  must  be  promptly  decided  whether  the  house  will  endeavor 
to  support  the  man  and  tide  him  over  his  difficulties  or  take 
no  further  risk  and  protect  itself  in  the  best  manner  possible. 
In  such  cases,  the  credit  man  must  try  to  forget  his  personal 
friendliness  to  a  great  extent.  He  is  representing  the  interests 
of  his  house  and  those  interests  are  his  first  consideration. 
He  must  know  accurately  all  the  conditions  surrounding  the 
business  of  the  unfortunate  one  and  be  able  to  decide  whether 
the  man  will  be  able  to  get  on  his  feet  if  the  house  continues 
to  support  him.  It  is  at  such  a  time  as  this  that  the  customer 
mil  find  that  his  reputation  for  honesty  and  fair  dealing, 
enterprise  and  business  ability,  established  through  his  con' 
fidential  and  friendly  personal  relations  with  the  house,  are 
his  most  valuable  asset. 

— Harlow  N.  Higinbotham 

President,  The  National  Grocer  Company 
Formerly  Credit  Manager,  Marshall  Field  and  Company 


XIII 

SYSTEMATIZING  RETAIL 
CREDITS 

By  T.  J.  Zimmerman 

IN  the  accounting  end  of  a  retail  credit  department, 
expansibility  and  promptness  are  the  two  essentials: 
expansibility,  because  the  great  retail  houses  now  carry 
anywhere  from  five  to  one  hundred  thousand  accounts 
on  their  books,  some  of  which  are  intermittent,  others 
very  heavy;  promptness^  because  it  is  much  more  im- 
portant in  retail  than  in  wholesale  business  to  train 
customers  to  prompt  paying,  and  this  can  only  be  ac- 
complished by  submitting  bills  regularly  and  quickly. 

Accounts  are  usually  opened  in  a  retail  store  in  an 
indirect  way.  A  customer  who  is  making  his  or  her  first 
credit  purchase  does  not  generally  make  a  direct  request 
for  credit,  but  simply  has  the  purchase  charged.  The 
clerk  who  makes  the  sale,  not  knowing  of  course  that 
this  customer  has  no  charge  account,  makes  out  his 
usual  charge  sales  slip,  indicating  that  the  sale  is  to  be 
charged.  The  ticket  is  passed  up  to  the  stamper  like 
any  other,  and  he,  not  finding  the  customer's  name  in 
his  book,  knows  this  is  a  new  customer,  and  sends  the 
matter  up  to  the  credit  office. 

If  the  customer  wishes  to  carry  the  goods  away  with 
him  on  the  first  purchase,  he  is  usually  requested  to  see 
the  credit  manager  at  once;  if  the  goods  are  to  be  de- 
livered, the  credit  manager  has  time  to  investigate  the 


134 CREDIT    SYSTEMS 

case  at  greater  leisurcj,  Wlien  such  a  first  charge  slip 
comes  to  the  credit  manager,  or  a  direct  request  for 
credit  is  made,  he  sets  the  machinery  in  motion  for  in- 
vestigating this  new  customer. 

HOW  the  retail  credit  man  seciii^es  and  verifies  infor- 
mation on  customers;  obiaining  credit  points  from 
personal  interviews'  recording  the  facts  obtained. 

In  the  first  place  he  may  request  a  personal  interview. 
In  this  the  two  things  he  seeks  to  discover  are  the 
integrity  of  the  applicant  and  his  resources.  The  first 
he  must  discover  through  his  powers  of  observation  and 
his  ability  to  read  human  nature,  and  also  from  the 
consistency  of  the  facts  which  the  applicant  gives  him. 
His  resources  he  must  find  out  from  direct  questions  as 
to  the  position,  income  and  the  property  of  the  applicant. 
These  facts — the  applicant's  name  and  residence,  place 
of  business,  or,  where  the  wife  applies,  the  husband's 
income  and  property — the  credit  manager  enters  on  a 
blank. 

He  ttien  proceeds  to  make  use  of  outside  sources  of 
information.  He  verifies  the  residence  and  the  place  of 
business  of  the  applicant.  He  applies  to  the  local  mer- 
cantile agencies  for  reports  upon  the  individual  in  ques- 
tion. These  agencies  in  one  way  or  another  accumulate 
a  great  mass  of  information  and  can  afford  reports  on 
many  individuals,  especially  those  questionable  persons 
against  whom  they  have  held  accounts  for  collection, 
or  previous  queries,  and  therefore  concerning  whom  they 
have  collected  information.  The  character  and  scope 
of  the  services  of  mercantile  agencies  in  this  direction  are 
improving,  and  information  on  almost  any  individual 
of  any  standing  is  obtainable.  These  agencies  gather 
information  almost  entirely  on  individuals  and  not,  as  a 


_^ RETAIL    ACCOUNTS 135 

rule,    on    firms    and    corporations    distinctly    as    such. 

The  regular  commercial  rating  agencies  can  be  ap- 
pealed to  in  case  the  applicant  is  a  man  engaged  in  any 
commercial  pursuits;  in  this  case  the  credit  man  will 
receive  the  same  information  that  a  wholesale  credit 
man  would  get — the  complete  facts  concerning  a  man's 
business  record,  integrity,  property  and  credit  standing. 

The  cjpedit  manager  receives  every  morning  the  mer- 
cantile sheets  and  legal  bulletins  which  give  the  bank- 
ruptcies and  failures  of  the  previous  day,  the  suits 
which  have  been  brought,  both  in  the  higher  courts  and 
justice  courts,  the  mortgages  foreclosed  and  chattel 
mortgages  recorded.  These  sheets  are  annually  compiled 
into  a  year  book,  and  into  a  decade  book,  so  that  one 
book  will  give  the  names  alphabetically  arranged  of  all 
individuals  against  whom  suits  have  been  filed,  or  who 
have  gone  into  bankruptcy,  or  against  whom  mortgages 
have  been  recorded  or  foreclosed  in  the  ten  years  past. 
This  is  a  very  important  source  of  information  to  the 
retail  credit  manager  in  a  large  city. 

In  the  majority  of  instances  a  personal  interview  with 
an  applicant  for  credit  is  not  necessary,  this  outside 
information  affording  all  the  data  essential  for  the 
formation  of  the  credit  manager's  judgment.  Usually 
the  applicant  is  not  even  aware  that  an  investigation 
has  been  made.  It  may  be  said  that  in  a  great  majority 
of  cases  where  credit  is  asked,  it  is  extended.  This  is 
done  because,  in  a  retail  more  than  in  a  wholesale  house, 
credit  can  be  guarded  and  qualified  according  to  the  cus- 
tomer's status. 

When  the  credit  manager  has  determined  that  exten- 
sion c>f  credit  is  advisable,  he  places  a  definite  limit  on 
the  monthly  credit  of  the  new  customer;  for  instance, 
he  detennines  from  his  knowledge  of  the  individual's 


136  CREDIT    SYSTEMS 


reputation,  income  and  resources  that  he  is  entitled  to  a 
credit  of,  say,  $50  a  month.  This  does  not  mean  that 
the  customer  will  never  be  allowed  to  buy  beyond  this 
sum,  although  no  one  but  the  credit  manager  has  dis- 
cretion to  extend  credit  beyond  this  sum,  and  he  will 
do  so  only  after  careful  investigation;  the  customer 
never  is  told  that  such  a  limit  has  been  set. 

When  an  account  is  opened,  the  name  of  the  customer 
and  the  salient  facts  regarding  him — his  residence, 
business  address  and  credit  limit — are  spread  on  all  the 
indexes  in  the  hands  of  the  stampers  throughout  the 
store.  The  duty  of  these  stampers  is  to  approve  of  all 
charge  sales,  and  the  names  and  limits  in  these  indexes 
afford  the  basis  on  which  they  pass  on  sales.  The  limit 
is  also  entered  at  the  top  of  the  customer's  ledger  page. 

All  information  collected  concerning  the  customer — 
his  own  statements,  reports  from  agencies  and  other 
facts — is  placed  in  a  folder,  which  is  filed  alphabetically 
in  a  vertical  file  cabinet.  In  this  folder  is  placed  also 
all  subsequent  information ;  for  instance,  if  the  customer 
becomes  notorious  for  slow  paying  or  for  complaints,  or 
if  his  account  has  to  be  placed  in  the  hands  of  an  at- 
torney for  collection,  these  facts  find  their  way  into 
this  folder,  and  it  becomes  a  complete  source  of  infor- 
mation upon  every  credit  customer  of  the  house.  These 
records  are  kept  in  the  credit  manager's  office. 

A  credit  manager's  sources  of  information  for  credit 
customers  of  whom  he  has  a  list  is  therefore  threefold. 
He  has  in  the  first  place  his  personal  impression  of  the 
customer,  in  the  second  place  he  has  all  the  specific 
facts  regarding  the  customer's  history  and  character  in 
his  folder  files,  and  in  the  third  place  he  has  the  cus- 
tomer's accounts.  Information  on  all  but  the  gilt-edged 
customer  should  be  revised  at  least  once  a  year.     For 


RETAIL    ACCOUNTS 137 

this  the  credit  manager  has  his  original  sources  of  data 
to  draw  from,  and  he  should  in  addition  go  over  all 
accounts  in  the  least  doubtful. 

Now  let  us  go  back  and  follow  the  course  of  one  charge 
sale  through  this  system,  on  the  supposition  that  the 
customer  making  the  purchase  has  an  open  account  with 
the  store. 

COMPLETE  course  of  a  customer's  order  from  the 
time  the  purchase  is  made  until  the  final  entries  and 
records  are  made  by  the  bookkeeping  department. 

When  the  sales  ticket  for  a  charge  sale  has  been  made 
out,  it  first  goes  to  a  stamper  to  be  approved  for  de- 
livery. There  may  be  twenty-five  such  stampers  scattered 
throughout  the  store.  Each  has  an  index  in  which  is 
listed  every  one  of  the  storeys  charge  customers,  in 
good  standing  or  otherwise. 

Opposite  each  name  is  set  a  certain  limit  of  credit. 
These  limits  must  be  revised  daily,  for  the  limit  here 
set  down  is  not  identical  with  the  customer's  regular 
credit  limit,  nor  is  it  wholly  determined  from  it ;  it  de- 
pends also  upon  the  amount  the  customer  already  owes 
for  the  current  month,  how  much  he  has  overdue  and 
his  general  standing.  As  a  further  safeguard  the 
stamper  is  allowed  to  pass  through  sales  up  to  only  one- 
fourth  of  this  limit.  If  the  sale  calls  for  a  greater  sum 
than  this,  the  ticket  must  be  sent  up  to  the  credit  office 
for  consideration.  It  must  be  remembered  that  the  pur- 
chases made  by  a  customer  in  one  visit  may  go  to  half 
a  dozen  different  stampers,  so  the  limit  of  each  stamper 
must  be  small.  The  credit  department,  having  complete 
information  at  hand,  can  determine  intelligently  and 
safely  whether  credit  above  this  limit  can  be  extended. 

To   follow  out  the   routine,    suppose   the   customer's 


138  CREDIT    SYSTEMS 

total  credit  limit  is  $50.  Suppose  it  is  the  20th  of  the 
month,  and  the  customer  has  already  drawn  upon  his 
account  to  the  extent  of  $20.  On  the  morning  of  the 
20th  the  credit  limit  placed  beside  this  customer's  name 
in  each  of  the  stamper's  books  will  probably  be  about 
$20,  and  each  stamper  can  pass  sales  through  for  sums 
up  to  $5.  If  a  purchase  exceeds,  it  is  referred  for  ap- 
proval to  the  credit  office. 

When  an  account  is  opened,  the  new  customer  gets 
a  card  with  merely  his  confidential  identification  number 
upon  it.  He  must  present  this  card  whenever  he  wishes 
to  carry  away  purchases  which  he  has  charged.  This 
prevents  one  person  buying  fraudulently  under  another's 
name.  The  salesman  attaches  this  card  to  the  sales 
ticket  and  it  is  passed  first  to  an  inspector — one  of 
whom  is  in  every  department — ^who  has  a  book  with 
these  numbers  listed  in  them  and  has  discretion  to  pass 
through  sales  up  to  a  limit  of  a  few  dollars.  If  the 
purchase  exceeds  this  limit,  the  inspector  refers  it  to  the 
floor  walker,  and  if  he  considers  the  amount  too  large 
for  him  to  pass  on  it  goes  up  to  the  stampers,  and  must 
pass  through  the  regular  routine. 

At  the  end  of  each  day,  all  charge  tickets  are  gathered 
together  and  go  into  the  credit  sales  section  of  the 
bookkeeping  department,  after  they  have  gone  through 
the  auditor's  office  and  been  checked  there.  The  charges 
are  immediately  posted  upon  the  ledgers.  Loose  leaf 
ledgers  are  used  in  this  system,  and  the  accounts  are 
arranged  alphabetically.  The  ledger  sheets  are  ruled 
off  for  three  columns:  in  the  first  column  are  entered 
each  day  the  debit  charges;  in  the  second  column  are 
entered,  in  red  ink,  credits;  in  the  third  column  is 
entered  the  balance  due.  This  column  is  balanced  every 
time  an  entry  is  made  in  either  of  the  other  two,  so  that 


RETAIL    ACCOUNTS 139 

a  glance  at  any  ledger  page  will  show  at  once  how  the 
account  stands.  When  a  ledger  sheet  is  full  it  is  trans- 
ferred to  the  transfer  files,  also  arranged  alphabetically, 
and  is  filed  away  in  vaults  with  its  predecessors.  This 
enables  an  establishment  to  keep  together  in  one  place 
the  entire  account  of  each  customer,  no  matter  how  many 
years  it  may  have  run. 

After  the  posting  is  completed,  the  sales  slips  are 
passed  on  to  the  billing  department,  and  the  charges 
are  immediately  entered  on  bills;  that  is,  bills  are  not 
made  from  the  ledger  account  at  the  end  of  the  month, 
but  sales  are  posted  direct  to  bills  day  by  day.  There- 
fore, if,  on  the  first  day  of  the  month,  Mr.  Smith  makes 
a  purchase  of  $10  and  has  it  charged  to  his  account,  the 
morning  of  the  2nd  this  slip  with  all  the  others  comes  to 
the  bill  clerks,  and  a  new  bill  for  the  month  of  June  is 
started  for  him,  upon  which  first  charge  is  at  once 
entered.  The  billhead  is  ruled  for  three  column  entries : 
In  the  first  column  are  entered  the  debit  charges,  not 
in  totals,  but  with  each  article  of  the  sale  itemized; 
the  second  column  is  used  for  totaling  these  individual 
articles  by  daily  sales;  the  third  column  is  used  for 
entering  credits.  The  bill  clerks  keep  the  bills  arranged 
alphabetically  during  the  whole  month,  and  each  day 
they  post  the  charges  from  the  previous  day's  sales 
tickets. 

On  the  last  day  of  the  month,  therefore,  the  bill  clerk 
has  merely  to  post  the  charges  of  the  day,  and,  without 
any  further  work  except  to  total  up  the  columns  and 
subtract  the  credit  from  the  debits,  the  bills  are  copi- 
plete  and  can  be  sent  out  at  once. 

The  bills  are  made  out  in  duplicate  and  the  carbon 
copy  is  filed  in  an  individual  folder  for  each  customer, 
in  a  vertical  filing  case,  where  are  kept  all  the  duplicate 


140  CREDIT    SYSTEMS 


bills  for  probably  the  previous  twenty-four  months. 
Retail  customers,  even  more  than  the  customers  of 
the  wholesale  houses,  must  be  trained  to  prompt  pay- 
ments. This  is  true  not  only  because  a  retail  house 
sells  on  a  close  margin  and  considers  after  all  that  it  is 
merely  doing  a  favor  by  extending  such  credit,  but 
also  because  it  is  impossible  to  get  the  close  information 
and  the  firm  hold  over  a  customer  that  the  wholesale 
house  can.  The  retail  house  deals  principally  with 
women.  For  this  reason  collections  must  be  made  in  a 
more  adroit  and  less  coldly  businesslike  way.  When 
an  account  is  opened  with  a  customer,  especially  if 
she  be  a  woman,  she  is  given  plainly  to  understand  that 
bills  must  be  met  between  the  1st  and  10th  of  the  month, 
immediately  upon  receipt  of  statement.  If  they  are  not 
paid  by  the  15th  a  second  statement  is  immediately  sent, 
calling  the  customer's  attention  to  the  oversight  and  ask- 
ing for  an  immediate  remittance.  The  customer's  charge 
sales  are  not  stopped  at  once  unless  the  account  in  ques- 
tion is  very  large,  for — and  here  again  because  the  cus- 
tomers are  chiefly  women — it  is  a  fatal  policy  to  refuse 
a  woman  credit  when  she  has  been  accustomed  to  receive 
it.  She  is  apt  to  regard  such  action,  which  a  business 
man  would  look  upon  as  an  ordinary  condition  of  busi- 
ness, as  an  insult,  and  promptly  withdraw  her  patron- 
age. 

EFFICIENT  policy  to  pvrsue  in  maldng  collections 
of  store  customers'  accounts;  the  'personal  element;  a 
system  in  use  by  a  department  store. 


If  the  second  statement  brings  no  result,  personal 
collectors  are  sent  out.  These  are  all  under  the  juris- 
diction of  the  credit  manager.  For,  as  has  been  said 
before,  this  is  not  purely  a  business  transaction.     There 


RETAIL    ACCOUNTS 141 

is  a  personal  and  human  element  in  it  which  must  be 
taken  into  consideration.  It  cannot  be  determined  on 
business  principles.  It  must  be  carried  on  with  an  un- 
derstanding and  consideration  of  human  nature  as  ex- 
emplified in  this  class  of  customers. 

The  credit  manager  of  a  retail  house  must  above  all 
remember  that  most  people  are  honest  and  want  to  be 
honest,  and  that  even  a  greater  majority  will  be  honest 
if  they  are  helped  along  in  the  right  direction.  He 
must  study  the  personalities  of  his  customers,  their 
social  and  business  conditions  especially,  so  that  he  will 
know  when  it  is  well  to  let  an  account  run  for  two, 
three  and  even  six  months  without  making  extreme  de- 
mands upon  the  customer.  On  the  other  hand,  when  a 
retail  credit  man  has  once  made  up  his  mind  that  he 
cannot  afford  to  get  any  deeper  with  a  customer,  he 
should  act  quickly  and  promptly.  The  customer  must 
be  made  to  understand  that  he  is  not  treating  the  house 
fairly  by  not  paying  his  account,  and  that,  although 
the  store  wants  his  account  and  is  glad  to  have  his 
business,  further  credit  must  be  refused  him  until  a 
settlement  is  made. 

The  collection  system  of  this  store  is,  therefore,  very 
simple.  It  uses  the  two  statements  mentioned,  and  after 
that  treats  each  case  individually  through  collectors 
under  the  instruction  of  the  credit  manager. 

A  retail  store  must  be  chary  of  bringing  suits  for 
collection  Bringing  a  suit  means  the  loss  of  a  cus- 
tomer in  a  double  sense.  The  retail  credit  man  always 
has  to  keep  in  mind  that  his  object  is  to  increase  sales, 
and  that  anything  he  may  do  to  lessen  cash  trade  is 
superlatively  criminal.  If  a  customer  is  not  worthy  of 
credit,  the  credit  man  should  at  least  not  turn  him  away 
from  the  paths  of  cash  buying.     A  suit  will  mean  the 


142 CREDIT    SYSTEMS 

loss  of  a  customer's  cash  trade  as  well  as  his  credit 
trade.  Then,  too,  habitual  suit  bringing  will  give  a 
store  a  bad  reputation.  The  outside  world,  not  knowing 
the  circumstances  of  the  case,  will  frown  upon  a  store 
which  is  known  to  bring  suit  frequently  and  quickly. 

Constant  pounding  by  correspondence,  by  repeated 
statements  and  collector's  visits^  is  much  more  efiieacious 
than  stringent  measures  in  bringing  payment  in  the 
case  of  the  retail  house,  where  a  debt  is  looked  upon 
more  as  a  thing  of  honor  and  less  as  a  thing  of  business. 


^ 


TWO  main  reasons  may  be  assigned  for  the  failure  of 
business  men:  Firsts  they  over-reach  themselves  in  times 
of  prosperity.  Second,  they  take  advantage  of  cheap  credit 
in  good  times  and  thus  involve  themselves  in  obligations  which 
are  difficult  or  impossible  to  meet  when  money  is  tight. 

When  credit  is  cheap,  business  men  are  quick  to  borrow 
money  where  they  can  get  the  lowest  rates  of  interest,  and  they 
disregard  the  personal  element.  In  times  of  financial  con- 
traction, cash  naturally  goes  at  a  premium  and  notes  are 
not  so  readily  renewed.  The  business  man  who  raises  a 
loan  from  a  local  bank  where  he  is  personally  acqttainted  is 
much  more  likely  to  receive  the  renewal  of  his  note  than  if 
the  loan  were  made  by  a  bank  in  a  distant  town  where  cash 
is  needed  more  than  promises  to  pay  and  where  the  personal 
element  does  not  enter.  Such  forced  payments  often  lead 
to  the  downfall  of  the  borrower. 

— Henry  OUesheimer 


XIV 

THE  CREDIT  SYSTEM  OF  AN 
INSTALMENT  HOUSE 


By  Henry  Marcus, 
Secretary  and  Treasurer,  Marcus  and  Klemperer  Company 


IN  every  business  the  collections  are  a  vital  part  of  the 
credit  department,  but  in  no  other  business  enter- 
prise are  the  collections  so  prominent  and  vital  a  feature 
as  in  a  business  conducted  on  the  instalment  plan.  In 
a  credit  system  for  the  instalment  house,  therefore,  the 
point  of  emphasis,  the  frame  about  which  the  structure 
must  be  built,  is  the  collections. 

Such  a  system  to  be  successful,  must  accomplish  four 
objects.  First,  it  must  provide  a  quick  means  by  which 
the  responsible  head  of  a  credit  department  may  ap- 
prove an  account.  In  a  retail  instalment  business  sales 
are  made  to  customers  personally  in  the  store,  and  ac- 
counts must  be  opened  almost  on  the  spur  of  the  moment, 
with  little  investigation,  and,  what  is  even  more  im- 
portant, without  giving  offense  or  annoyance  to  the  cus- 
tomer, who  is  probably  standing  at  the  credit  man's 
elbow  while  he  is  deciding  on  the  advisability  of  extend- 
ing credit 

In  the  second  place,  the  system  must  afford  adequate 
security  for  the  goods  sold,  and  in  this  way  make  up 
for  the  almost  entire  impossibility  of  choosing  customers. 
Third,  since  the  amount  involved  is  relatively  small  to 
begin  with,  the  instalment  payments  themselves  are,  of 
course,  still  smaller.     The  bookkeeping  required  for  a 


144 CREDIT    SYSTEMS 

single  purchase  is  considerable,  and  the  system  must 
seek  to  reduce  and  simplify  it  as  much  as  possible. 
Lastly,  the  system  must  provide  a  cheap  and  simple 
but  efficient  and  almost  automatic  method  for  making 
the  collections.  This  is  its  most  important  function. 
The  system  here  described  is  in  use  in  a  large  furniture 
instalment  house,  and  has  been  found  to  fulfill  these 
four  objects. 

SYSTEMS  used  by  the  credit  man  of  an  instalment 
house  for  taking  care  of  his  accounts — the  order  blank 
and  duplicates;  the  mortgage;  bookkeeping  entries. 

"When  a  sale  which  is  to  be  paid  in  instalments  is 
made,  the  salesman  makes  out  an  order  blank,  such  as 
is  shown  in  Form  IV.  On  this  blank  he  enters  the  name 
and  address  of  the  customer,  the  amount  of  the  cash 
payment,  the  amount  and  the  time  of  the  monthly  instal- 
ment, and  the  salesman's  name.  In  the  spaces  below  are 
then  entered  the  various  items  of  goods  bought. 

The  order  goes  at  once  to  the  head  of  the  credit  de- 
partment, or  preferably  to  a  member  of  the  firm,  for 
approval.  If  approved,  the  purchaser  gives  to  the  house 
his  note  for  the  amount  of  the  sale  less  the  cash  pay- 
ment. This  note  is  secured  by  a  mortgage  taken  by  the 
seller  on  the  goods  sold.  The  mortgage  must  at  once  be 
taken  by  the  customer  before  a  justice  of  the  peace  to 
be  sworn  to,  and  before  a  county  recorder  to  be  re- 
corded.   The  goods  are  then  shipped  to  the  customer. 

This  sale  order  has  been  made  out  in  duplicate,  one 
to  be  kept  in  the  office  as  the  original  record,  the  other 
to  be  sent  to  the  various  department  heads,  in  order  that 
they  may  find  out  at  once  whether  they  have  the  goods 
desired  in  stock.  In  the  office  the  order  is  given  a 
number,  by  which  this  sale  is  known  forever  after.    A 


INSTALMENT    ACCOUNTS 


145 


0 


o 


SPIEGEL'S  HOUSE  FURNISHING  CO. 


ORDER  NO. 

NAME_ 

ADDRESS  _ 

TERMS 


(  1ST  PMT  

I   MONTHLY  _ 
SALESMAN. 


QUANTITY  NUMBER  MAKER 


o 


o 


RECEIVED  OF  SPIEGEL'S  HOUSE  FURNISHING  CO. 

THE  FOLLOWING  ARTICLES  IN  GOOD  ORDER  AND  PERFECT  CONDITION 


NAME 
ADDRESS 


CHECK     QUANTITY     NUMBER     MAKER 


o 


o 


SPIEGEL'S  HOUSE  FURNISHING  CO 

ORDER  NO. 

OAT^ 

NAME 

ADDRESS 

WHEN 
SALESMAN 

HOW 

CHECK    QUANTITY    NUMBER     MAKER 


FORM  IV:     The  upper  form  is  the  salesman's  order  blank;  the  lower  is 
one  of  (he  triplicate  topics  made  out  in  the  office;  the  middle  is  the  driver's 

copy 


146 CREDIT    SYSTEMS 

clerk  then  makes  out  a  new  order  sheet  (Form  IV)  in 
triplicate  from  this  sales  blank,  entering  thereon  the 
same  data  as  was  on  the  order  blank,  except  that  the 
price  goes  only  on  the  first  sheet.  This  sheet  remains 
in  the  office ;  from  it  all  the  office  records  described  below 
are  made.  The  other  two  go  to  the  shipping  depart- 
ment. One  of  these,  identical  with  that  shown  in  Form 
IV,  serves  as  the  shipping  clerk's  assembling  sheet.  As 
the  various  items  on  the  order  are  loaded  on  the  wagon 
after  being  assembled,  he  checks  them  off  his  sheet. 
Those  articles  ordered  which  he  has  not  in  stock,  and 
shipment  of  which  he  must  delay,  he  circles  on  the  sheet, 
and  at  the  same  time  enters  on  a  back  order  sheet.  This 
he  keeps  on  file  and  checks  off  the  articles  thereon  as  he 
receives  them  from  the  manufacturer  and  delivers  them 
to  the  customer.  The  third  sheet  serves  as  the  driver's 
receipt  (Form  IV)  ;  he  carries  this  with  him,  has  it 
signed  by  the  customer  and  returns  it  to  the  shipping 
clerk.  "When  the  goods  have  been  delivered,  the  two 
sheets  which  were  used  in  the  shipping  department  are 
returned  to  the  office  and  filed  numerically  for  future 
reference,  in  case  complaint  is  ever  made  of  non-delivery 
or  delivery  of  wrong  goods. 

From  the  sheet  which  is  left  in  the  office,  two  cards 
are  made  out,  one  the  ledger  card,  the  other  the  col- 
lector's card.  All  ledger  accounts  are  kept  on  cards 
which  are  filed  alphabetically,  according  to  the  name  of 
the  customer.  On  the  ledger  card  (Form  V)  is  entered 
the  name  and  address  of  the  customer,  his  occupation, 
the  name  of  the  salesman,  date  of  the  sale,  the  order 
number,  the  amount  of  the  purchase,  the  amount  of  the 
first  payment,  and  the  balance  due.  In  the  blanks 
provided  underneath  are  entered  in  red  ink  the  dates 
and  amounts  of  the  instalment  payments  to  which  the 


INSTALMENT    ACCOUNTS 


147 


customer  has  pledged  himself,  and  spaces  are  provided 
for  the  entry,  in  black  ink,  of  the  date  and  amount  of 
the  actual  payments  and  the  balances  due  after  each 
payment.  By  comparing  the  black  and  the  red  entries 
at  any  time  the  exact  condition  of  the  account  can  be 
seen. 

Whenever  a  sale  is  made,  the  amount  of  cash  paid 
down  is  entered  on  the  cash  book,  while  the  amount  of 
the  charge,  that  is  to  say,  the  amount  of  the  sale,  less 
the  cash  payment,  is  entered  in  the  journal  and  the  folio 
on  which  this  account  is  entered  is  also  recorded  on  the 


IM«I 

"~~~ 

"" 

"■ 

"" 

^""~ 

"""^ 

—f 

FOLIO       OATC 

OnOER  NO.     PURCNASC 

I.TMVK. 

BALANCC 

AODRCSS 

<»eeuP»TioN 

««    1 

OCT       I      PATE        g     CRIDIT                       •*L*NCC 

n    o»Tr     fl     ci«T     1 

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emioiT               •aiAttftc 

- 

1 

i 

i 

III 

— 

OATC  OUC 

DmCFKIO 

IMTtT10t| 

•  MOUMT     0*TIP«10 

SPIEGEL'S  HOUSE    FURNISHING  CO. 

i«a-t«4-i»s  w«a«stnkvcNus 

NO.                  CHje*ao 

N*«it 

«DOIIUW_ _..,—....<„.  ............^ 



...^. ,        „. 

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MLCSMAH _ 

.1 

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'^^                            -■"        """•  -  J-X--1 

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- H 

■—• •"'•' - 

~- 

"•.—~"~— .••—•« 

- H 

"■"' ~ "I 



_ 

;:;:::;;::::::::;:::::;":::-::::;: 

FORM  V:     The  ledger  and  collector's  cards:    Both   are  similar  on  the 

reverse  side.     The  collector  s  card  is  placed  ahead  in  the  tickler  file  to  come 

up  on  the  date  the  next  payment  falls  due 

ledger  card  so  that  it  can  be  referred  to  at  any  time. 

The  collector's  card  (Form  V)  has  recorded  upon 
it  the  same  data  as  the  ledger  card,  but  is  placed  in  a 
tickler  cabinet,  according  to  the  date  on  which  the 
next   payment  falls   due.     In   the  case,   for   instance, 


148  CREDIT    SYSTEMS 


that  a  sale  was  made  on  February  1st  amounting  to 
$100,  of  which  $10  was  paid  down  and  the  first  instal- 
ment is  due  March  1st,  the  collector's  card  would  be 
filed  in  the  next  "1"  section  of  the  tickler.  On  the  morn- 
ing of  March  1st  the  cards  in  this  IMarch  pigeonhole,  all 
with  payments  due  this  day,  are  pulled  out;  each  is 
compared  with  its  corresponding  ledger  card  to  see  if 
the  payment  due  has  already  been  made  by  the  customer ; 
and  if  the  ledger  card  shows  that  the  payment  was  made 
say,  two  days  before,  the  amount  of  the  payment  and  the 
date  are  entered  on  the  collector's  card,  and  it  is  thrown 
ahead  into  the  pigeonhole  of  the  next  payment,  April 
1st.  The  cards  of  the  customers  who  have  not  paid  are 
given  to  the  manager  of  the  collection  department.  He 
first  looks  through  them  carefully  to  see  whether  any 
there  are  regular,  good  payers,  and  not  therefore  to  be 
dunned.  The  cards  of  these  customers  he  takes  out  and 
files  in  the  tickler  a  few  days  ahead ;  if  by  the  time  these 
cards  come  to  him  again  the  payments  have  not  been 
made,  he  will  send  the  collector  to  the  customers. 

The  rest  of  the  cards  the  collection  manager  classifies 
by  districts  into  which  he  has  the  city  divided  for  col- 
lection purposes,  and  to  each  of  which  a  collector  is  as- 
signed. Before  the  cards  are  given  over  to  the  collectors, 
the  name  of  each  customer  and  the  amount  due  is  entered 
on  a  book,  which  serves  as  a  check  on  the  cards  while 
they  are  out,  and  a  receipt  from  the  collectors  for  the 
cards  which  they  carry.  The  collectors  call  on  the 
customers  whose  cards  they  hold,  and  when  they  return 
to  the  store  in  the  evening  they  record  opposite  the 
names  in  the  book  mentioned  what  each  customer  has 
done — ^whether  he  has  paid,  whether  he  has  promised 
to  pay  on  some  future  date,  or  whether  he  was  not  at 
home.    A  clerk  then  takes  the  book,  collector's  cards  and 


INSTALMENT    ACCOUNTS 149 

the  ledger  cards  corresponding  to  them.  Where  a  col- 
lection has  been  made  he  enters  it  on  both  cards  and  files 
the  collector's  card  according  to  the  date  of  the  next 
payment ;  if  a  customer  has  promised  to  pay,  say  in  ten 
days,  this  fact  will  be  entered  on  the  collector's  card, 
which  will  be  filed  for  March  10th;  if  a  customer  has 
promised  to  call,  this  fact  is  entered  on  the  card  and 
it  is  filed  in  a  pigeonhole  at  the  cashier's  desk  according 
to  the  day  on  which  he  has  promised  to  call.  The  cashier 
thus  keeps  track  of  these  people  and  finds  out  whether 
they  do  as  they  promise.  The  cards  of  those  customers 
who  were  not  at  home  are  again  taken  out  by  the  col- 
lector on  the  following  day. 

HOW  customers*  payments  on  accounts  are  entered 
on  the  ledger  cards;  how  future  payments  are  pro- 
vided for;  the  method  used  for  filing  the  reports. 

When  a  payment  is  made  at  the  office,  it  is  at  once 
entered  on  the  ledger  card,  which  is  quickly  found,  as 
it  is  filed  alphabetically.  From  the  dates  in  red  ink  on 
the  ledger  card  it  can  easily  be  determined  in  what 
pigeonhole  of  the  tickler  the  corresponding  collector's 
card  is,  and  so  this  card  can  be  looked  up,  the  payment 
entered,  and  the  card  filed  ahead  for  the  next  payment. 

Should  a  new  purchase  be  made  by  a  customer  while 
a  previous  instalment  account  is  still  open,  the  ledger 
and  collector's  cards  of  the  old  account  are  also  used 
for  the  new.  The  date  and  amount  of  the  cash  down 
payment  are  entered,  as  before,  the  amount  of  the 
monthly  instalment  payments,  entered  in  red,  are 
changed  to  correspond  to  the  increase  brought  by  the 
new  purchase,  and  the  balance  due  will  also  be  in- 
creased. This  combining  of  payments  saves  collection 
labor  and  confusion. 


150 CREDIT    SYSTEMS 

When  an  account  is  paid  up,  both  cards  are  stampe< 
paid  and  filed  away  alphabetically.  Thus,  a  custome: 
who  has  had  twenty  or  thirty  accounts  with  this  firn 
will  in  all  probability  have  twenty  or  thirty  old  ledge: 
cards  and  they  will  be  all  filed  together,  so  that  hii 
record  can  be  looked  up  at  any  time — a  valuable  asse 
in  a  business  of  this  kind  with  thousands  of  customer 
and  information  regarding  them  hard  to  obtain. 

The  value  of  the  card  ledger  for  this  kind  of  busines 
cannot  be  over-emphasized.  Whatever  may  be  the  ad 
vantages  in  other  kinds  of  accounting,  for  instalmen 
accounts  it  seems  almost  indispensable.  With  so  man; 
small  accounts,  requiring  so  many  small  and  frequen 
entries,  the  keeping  of  accounts  in  the  old-time  heav^ 
tome,  unwieldy  and  cumbersome,  would  more  thai 
double  the  offi.ce  work.  The  inevitable  scattering  o 
different  accounts  of  the  same  customer  throughout  vari 
ous  volumes  would  render  it  impossible  to  study  then 
all  together,  and  would  thus  destroy  the  most  valuabi 
source  of  information  of  the  instalment  house.  Th 
ledger  cards  also  serve  as  an  alphabetical  index  of  al 
customers,  an  immense  saving  of  time  and  money  whicl 
would  be  required  to  keep  so  necessary  a  record. 

A  FTER  all  is  said,  the  credit  man  much  prefers  to  meet 
-^  his  customer  face  to  face.  In  this  way  he  can  bring 
into  effect  all  his  power  of  judging  personality.  I  presume 
that  i  have  made  mistakes  in  reading  men's  faces,  hut  I  am 
usually  able  to  decide  very  promptly  by  a  mans  talk  and 
appearance  whether  he  is  honest  or  dishonest.  I  can  read 
it  in  his  countenance,  his  talk  and  his  manner. 

— Harlow  N.  Higinbotham 

President,  The  National  Grocer  Company 
Formerly  Credit  Manager,  Marshall  Field  and  Company 


PART  IV-INVESTMENTS, 
CREDIT  AND  FINANCE 


Work  with  Your  Banker 

T) ANKERS   in  all  sections  of  the  country  are 
often   handicapped  in  their  efforts  to  help 
their  clients,  particularly  the  smaller  ones,  owing 
to  a  lack  of  knowledge  of  their  affairs. 

Few  business  men  seem  to  realize  that  they 
are  neglecting  an  available  asset  which  could  be 
made  to  be  of  great  service  if  used  in  the  right 
way,  that  is,  by  keeping  in  touch  with  their  bank- 
er. Educate  him — quietly,  but  persistently.  He  is 
the  same  kind  of  a  human  being  that  you  and  your 
associates  are  and  will  take  more  of  a  personal 
interest  in  the  things  that  he  understands  best. 

One  often  hears  the  complaint  that  the  bank 
measures  every  business  with  the  same  yard 
stick.  But  take  the  trouble  to  discuss  your  af- 
fairs freely  and  frankly  and  intelligently  with 
your  banker,  and  perhaps  he  will  know  what 
kind  of  a  measure  to  use  in  your  case. 


V 


r.  B.  ANDERSON 

President,   The  Bank  of  California 


XV 

FINANCING  A  NEW 
ENTERPRISE 

By  Henry  Clews 
of  Henry  Clews  &  Company 

VIEWED  from  the  banker's  standpoint,  the  financial 
beginning  of  a  commercial  venture  is  the  stock 
issue.  This  is ,  the  first  step  in  the  business  develop- 
ment known  as  industrial  increase.  The  issue  of  the 
stock  also  brings  about  the  first,  the  most  personal  and 
most  vital  relation  that  ever  exists  between  a  banking 
house  and  a  manufacturing  or  selling  organization. 

The  organizers  of  the  corporation,  rather  than  the 
banker,  however,  should  take  the  first  step  and  decide 
the  direction  of  the  stock  issue.  Few  men  will  lay  the 
foundation  of  a  corporation  without  figuring  the  costs, 
reviewing  their  forces  and  assuring  themselves  of  their 
ability  to  meet  their  obligations.  This  study  of  their 
problem  will  suggest  to  these  organizers  the  investors 
most  likely  to  be  attracted  by  the  new  venture.  For 
this  reason,  it  is  better  that  the  business  man  determine 
the  most  advantageous  disposition  that  could  be  made 
of  the  stock  issue  of  his  enterprise  before  he  consults  a 
banker.  In  fact  this  will  sometimes  denote  also  the 
house  best  adapted  to  handle  his  securities. 

There  are  many  conditions  that  may  influence  the 
placing  of  stocks.  There  are  always  those  timely  con- 
ditions that  arise  during  the  formation  of  the  enterprise 
and  that  are  more  or  less  personal;  and,  in  addition, 


154 FINANCE    AND    INVESTMENTS 

there  are  the  great  fundamental  questions  that  present 
themselves  to  the  observant  minds  in  all  undertakings. 

First,  let  me  name  the  chief  of  these  questions;  and 
afterward  give  them  specific  application.  They  run 
something  as  follows:  When  is  it  best  to  retain  the 
stock  issue  entirely  within  the  active  management? 
When  is  it  most  advantageous  to  interest  only  local 
capital  ?  When  is  it  desirable  to  include  those  particular 
commercial  interests  that  seem  likely  to  come  into  close 
relation  with  the  proposed  industry  ?  When  is  it  wisest 
to  put  the  stock  on  the  open  market  without  any  means 
of  directing  its  purchase? 

These  are  the  four  most  important  questions.  It 
must  be  taken  for  granted,  to  give  the  illustrations  force, 
that  the  operations  taken  under  consideration  are  of  such 
evident  worth  and  stability,  that  the  method  of  distri- 
bution conceded  to  be  the  best  is  always  possible.  Obvi- 
ously, as  has  been  already  suggested,  there  are  very  often 
reasons  known  only  to  the  organizers,  that  compel  the 
distribution  of  stock  in  a  manner  not  at  all  in  accordance 
with  the  general  principles. 

WHEN  the  capital  stock  of  an  enterprise  should  be 
retained  ivithin  the  organization — restricting  the 
distribution  of  the  shares  of  a  retail  concern. 

Under  ordinary  conditions,  it  is  desirable  that  a  retail 
mercantile  concern  should  retain  the  capital  stock  within 
the  limits  of  its  organization.  Only  those  who  have  had 
experience  should  be  permitted  to  dictate  the  policy  of 
a  concern  that  must  appeal  directly  to  the  diversified 
tastes  of  the  general  public.  They  must  not  only  know 
the  goods  demanded  by  those  within  the  radius  of  their 
district;  they  must  be  able  to  anticipate  the  impression 
that  they  make  upon  the  public  at  every  point  of  con- 


HOW    TO    RAISE    CAPITAL 155 

tact  and  never  permit  personal  tastes  to  enter  into  the 
result. 

This  method  of  operation  must  be  carried  into  the 
smallest  details.  Store  decorations,  window  trimming, 
personnel  of  employees,  location  of  departments — a 
thousand  points  that  an  inexperienced  stockholder  might 
endeavor  to  block  with  *'I  don't  like  this,  or  that  or  the 
other."  If  outside  capital  must  be  secured,  let  it  come 
from  those  who  have  implicit  confidence  in  the  organizers 
and  who  will  consider  it  only  as  a  profitable  investment. 

Of  more  general  application  is  the  second  proposition 
of  interesting  local  capital.  In  speaking  of  local  capi- 
tal, I  refer  neither  to  investors  who  will  be  actively 
interested  in  the  management  of  an  industry,  nor  to 
those  who  would  invest  from  a  feeling  of  friendship  or 
confidence  through  long  and  intimate  acquaintance  with 
the  promoters.  I  use  the  term  local  capital  to  indicate 
merely  a  geographical  standpoint. 

Take  for  example  the  interurban  trolley,  the  gas, 
electric  light,  or  water  company  of  the  smaller  city. 
Nothing  will  aid  it  so  much  in  its  work  of  construction, 
its  securing  and  retaining  patronage,  as  having  its 
shares  scattered  among  the  merchants  and  professional 
men  of  the  community.  This  system  of  distribution  has 
also  proved  most  beneficial  to  local  telephone  companies 
and  has  greatly  aided  them  in  gaining  the  loyalty  of 
the  subscribers.  The  very  apparent  worth  of  this  plan 
removes  any  need  for  further  elaboration. 

Manufacturing  and  retail  concerns  may  also  fre- 
quently follow  this  method  and  to  very  good  advantage. 
Every  community  is  pleased  to  see  its  business  activity 
on  the  increase  and  may  usually  be  depended  upon  to 
lend  financial  as  well  as  moral  support. 

As  to  the  actual  task  of  placing  shares  locally,  there 


/ 


156 FINANCE    AND    INVESTMENTS 

are  various  methods  that  may  be  pursued.  Often  the 
organizers  will  personally  solicit  the  merchants  and 
capitalists  of  the  city  where  the  business  is  to  be  started. 
This  plan  has  proved  particularly  successful  where  some 
member  of  the  concern  already  holds  local  interests  in 
good  standing. 

Another  business-like  method  is  to  retain  the  service 
of  some  man  of  clean  reputation  and  appearance,  and 
to  send  him  out  like  any  other  salesman  with  a  carefully 
selected  list  of  those  who  would  most  probably  be  inter- 
ested. A  personal  letter  sent  in  advance  to  each  pros- 
pective buyer  will  serve  as  an  introduction  and  will 
show  that  the  representative  has  authority.  This  sales- 
man need  not  be  experienced,  for  any  bright  young  man 
can  be  coached,  in  a  very  short  time,  so  that  he  can 
answer  any  pertinent  question  that  may  be  asked. 

Advertisements  in  local  papers  often  bring  very  good 
results  when  used  in  connection  with  either  of  the  be- 
fore-named plans.  These  notices  should  state  that  par- 
ticulars will  be  sent  on  request;  that  a  representative 
will  call  if  desired;  or  that  any  interested  person  will 
be  welcome  between  certain  hours  at  the  company's 
office,  where  a  member  of  the  organization  will  be  pleased 
to  give  all  information. 

The  publicity  method  is  good  also  when  a  local  banker 
has  charge  of  the  sale  of  shares.  In  fact,  to  win  over 
the  local  press  by  spending  some  money  with  it  is  sel- 
dom a  poor  investment,  for  you  are  sure  to  get  generous 
news  items  and  kindly  gossip. 

Where  it  is  not  possible  or  wise,  with  ventures  of  this 
class,  for  the  organizers  to  attempt  placing  the  shares, 
then  is  the  time  to  have  the  matter  handled  through  a 
local  banker.  These  men  are  known  to  be  versed  in 
affairs  of  this  kind  and  they  Imow  where  capital  is  to  be 


HOW    TO    RAISE    CAPITAL 157 

found.  The  presentation  of  a  proposition  of  this  kind, 
where  local  organizers  have  to  deal  with  a  banker  of 
their  conununity,  merely  demands  a  meeting  between 
the  two  parties  and  the  giving  of  all  details  by  the 
organizers  to  the  banker.  When  the  latter  is  not  able 
to  take  shares  direct  to  capitalists  whose  names  are  on 
his  books  as  ready  investors  he  follows  the  same  method 
as  has  been  outlined  for  use  by  the  company  when  they 
place  their  stock  themselves. 

DISTRIBUTION  of  stock  among  dealers  in  the  same 
line  is  one  of  the  most  advantageous  methods  of 
financing  manufacturing  and  wholesale  ventures. 

The  third  plan  of  financing  is  one  that  requires  most 
careful  review  and  it  may  be  said  to  relate  particularly 
to  manufacturing  and  wholesale  ventures.  There  are  a 
number  of  reasons  why  it  is  desirable  for  a  manufac- 
turing concern  to  have  some  of  its  stock  placed  with 
houses  handling  its  goods,  provided  these  houses  are 
sufficiently  scattered  to  remove  all  possibility  of  compe- 
tition among  them.  These  stockholding  customers  will 
take  the  factory's  goods  and  advertise  them  to  the  best 
advantage.  They  will  take  the  trouble  to  send  in  sug- 
gestions as  to  the  needs  of  their  district.  They  will  be 
more  reasonable  in  their  demands.  And  the  factory  will 
be  sure  of  its  customers,  for  the  provocation  must  be 
great  that  will  compel  a  house  to  buy  from  a  rival  of 
one  in  which  it  holds  stock. 

These  same  advantages  apply  to  the  wholesaler  who 
places  his  stock  in  the  hands  of  large  retailers  in  various 
cities.  Throughout  the  entire  retail  organization,  down 
to  the  clerk  behind  the  counter,  the  command  is  given 
to  ''push''  the  products  of  this  dealer. 

But  the  danger  in  all  this  is  that  one  customer-stock- 


158 FINANCE    AND    INVESTMENTS 

holder  may  become  so  powerful  as  to  dictate  the  efforts 
of  the  manufacturer  or  wholesaler,  to  the  detriment  of 
the  other  customer,  or  he  may  dispose  of  his  stock  to 
a  rival  manufacturer  or  wholesaler,  who  may  be  en* 
deavoring  to  compel  a  combination,  or  hoping  to  secure 
enough  stock  to  take  over  the  rival. 

Some  of  these  difficulties  may  be  avoided  by  having 
the  stock  before  any  attempt  is  made  to  dispose  of  it 
agrees  to  give  the  company  an  opportunity  to  buy  back 
the  stock  before  any  attempt  is  made  to  dispose  of  it 
elsewhere.  This  is  especially  advisable  where  it  is  desired 
to  keep  control  of  the  stock,  where  there  is  danger  of 
its  getting  into  unfriendly  hands,  or  where  the  organi- 
zers wish  eventually  to  hold  all  the  stock. 

The  fourth  plan  is  to  go  with  your  stock  into  the  open 
market,  or,  more  properly  have  it  taken  there.  The 
desirability  of  this  method  relates  to  those  branches  of 
commerce  that  may  be  termed  national  industries;  in 
fact  they  are  the  only  form  of  enterprise  that  is  ad- 
mitted. ^Yall  Street  does  not  recognize  the  terms 
''close"  and  ''open,"  as  applied  to  small  corporations. 
In  this  financial  center  the  word  "corporation"  is  only 
considered  in  connection  with  industries  of  the  greatest 
scope  and  appraised  value.  And  to  these  concerns,  Wall 
Street  is  the  only  possible  outlet  for  their  securities. 
The  extent  of  their  enterprises  is  so  gigantic  that  it 
would  be  impossible  to  choose  their  stockholders.  The 
interests  quoted  in  Wall  Street  are  usually  the  out- 
growth of  an  amalgamation  of  smaller  concerns  already 
in  operation. 

In  regard  to  the  formation  of  a  national  industry,  it 
is  without  question  the  better  plan  to  represent  the  mat- 
ter to  a  banker  in  one  of  the  largest  cities.  It  is  hardly 
possible  to  outline  a  method  of  procedure  to  be  followed 


^ HOW    TO    RAISE    CAPITAL 159 

in  putting  such  a  proposition  before  a  banker,  for,  as 
has  been  stated,  a  corporation  planning  this  form  of  dis- 
tribution for  its  stock,  must  be  of  considerable  impor- 
tance in  both  the  industrial  and  financial  world.  Bearing 
this  fact  in  mind,  it  will  be  seen  that  many  of  the  larger 
banking  houses  will  at  the  beginning  have  some  intima- 
tion of  the  nature  of  the  new  concern  and  of  those  who 
are  back  of  it.  Should  the  affair  be  kept  an  entire  secret 
it  would  only  need  the  presentation  of  an  outline  of 
both  purpose  and  personnel  to  the  banker  whose  former 
operations  have  shown  him  best  adapted  to  handle  the 
work.  If  this  introduction  is  favorably  received,  the 
next  step  is  to  arrange  an  interview,  at  which  time  an 
experienced  banker  would  readily  be  able  to  present  the 
terms  upon  which  he  would  undertake  the  placing  of  the 
shares. 

BANK    aid   in   selling    stock  for    new    enterprises; 
underwriting    of  stock  issues;  how  the  cooperation 
of  the   bank  opens  the  field  for  securing  investments. 

The  banker  may  underwrite  the  entire  amount  of 
stock  to  be  put  on  the  market  or  he  may  charge  a  per- 
centage commensurate  with  the  task  at  hand.  Should 
he  pursue  the  former  method,  it  is  because  he  is  so 
confident  of  the  success  of  the  venture  that  he  will  take 
over  the  burden  for  the  hope  of  the  greater  reward  that 
will  come  through  a  rise  in  values.  When  a  per  cent 
is  charged,  it  usually  varies  from  one  to  two  and  a  half, 
the  banker  making  no  promise  to  place  the  whole  block 
that  is  for  sale.  He  lends  the  great  support  that  his 
name  will  give  to  the  undertaking  and  he  uses  the  ex- 
perience that  years  of  intimate  contact  with  such  work 
has  provided.  He  knows  all  the  possible  outlets,  in  their 
order,  from  the  most  likely  to  the  least  probable.     He 


160  FINANCE    AND    INVESTMENTS .^ 

knows  how  to  make  the  introduction  that  means  so  much 
in  regard  to  a  favorable  reception  for  the  interests  of 
the  venture. 

In  the  actual  methods  the  banker  employs  in  placing 
the  securities  which  he  has  undertaken  to  dispose  of, 
advertising  along  the  usual  lines  is  one  of  the  greatest 
factors.  He  cooperates  with  the  promoters  in  the  prep- 
aration of  a  prospectus  that  states  fully  and  clearly  the 
purpose  of  the  new  enterprise.  Advertisements  are 
then  placed  in  mediums  known  to  reach  persons  who 
have  money  to  invest.  This  publicity  seldom  consists 
of  more  than  an  announcement  of  the  barest  facts,  con- 
cluding with  the  request  that  prospective  investors  send 
for  more  detailed  information,  and  to  these  the  pros- 
pectus is  mailed,  with  any  further  information  relating 
to  conditions  that  may  have  developed  since  its  com- 
pilation. 

As  to  the  other  questions  that  may  arise  when  the 
task  of  placing  securities  is  considered,  it  is  not  unlikely 
that  the  banker  may  be  able  to  shed  some  light  upon 
them.  Frequently  the  personal  questions  that  come  up 
are  given  more  attention  than  their  value  demands.  At 
these  times  and  on  these  questions,  the  experience  of  the 
banker  is  often  valuable  in  putting  them  in  their  right 
relation,  or  of  pointing  the  way  to  their  removal,  to 
the  benefit  of  the  organization. 

CREDIT  is  usually  extended  on  the  strength  of  the  "quick 
assets"  shown  in  the  financial  statement.  While  real 
estate  and  machinery  may  be  good  assets,  yet  their  immediate 
market  valu£  is  uncertain,  and  consequently  accounts  and 
bills  receivable,  and  merchandise  which  can  readily  and 
quickly  be  twmed  into  cash  are  the  principal  items  taken  into 
consideration  in  the  making  of  bank  loans. 

— William  B.  Lavinia 


XVI 

PUTTING  CREDIT  EXTENSIONS 
ON  A  SOUND  BASIS 

By  Howard  R.  Huse 

MUCH  of  the  criticism  uttered  against  bankers  for 
refusals  to  grant  credit  is  due  to  a  misconception 
of  what  is  safe  and  legitimate  banking,  and  failure  to 
understand  the  exact  position  of  the  banker.  A  banker 
is  often  regarded  in  much  the  same  way  as  a  private 
money  lender.  The  necessities  of  his  position  are  not 
taken  into  account. 

In  financing  a  business  there  is  nothing  more  im- 
portant than  to  know  definitely  the  relation  of  the 
banker  to  business.  This  knowledge  insures  not  only 
sound  financial  principles,  but  the  ability  to  make  the 
maximum  safe  use  of  the  banker's  services. 

A  banker  is  not  lending  his  own  money,  or  money 
which  is  under  his  permanent  control.  The  deposits  of 
a  commercial  bank  are  temporary  funds,  and,  while 
they  are  not  likely  to  be  called  for  all  at  once,  it  is  a 
fundamental  principle  of  sound  banking  that  they  be 
kept  ** liquid,"  that  is,  in  temporary  investments,  con- 
stantly being  liquidated  and  re-invested.  Therefore  in 
applying  for  bank  credit,  the  business  man  should  deter- 
mine whether  the  funds  he  asks  for  will  be  kept  liquid, 
whether  or  not  the  banker  can  grant  him  the  loan  with- 
out violating  this  first  principle  of  sound  banking. 

A  banker  should  not  be  expected  to  furnish  any  part 


>v. 


162 FINANCE    AND    INVESTMENTS 

of  the  permanent  capital  required  in  any  business.  This 
money  should  be  obtained  not  from  banks,  but  on  long 
time  loans  or  on  bond  issues  from  private  investors. 
The  firm's  bank  credit  should  be  preserved  and  held  in 
reserve  as  a  resource  for  temporary  needs,  to  enable  the 
firm  to  discount  bills,  to  take  advantage  of  markets,  or 
to  meet  temporary  emergencies.  The  money  obtained 
from  banks  should  exclude  the  amount  which  is  required 
for  carrying  on  the  business  under  normal  conditions. 

In  the  second  place  a  business  man  should  be  able 
to  show  the  banker  the  exact  condition  of  his  business. 
Many  business  men  fail  to  get  credit  because  they  fail  to 
present  their  affairs  in  a  way  that  will  assure  the  banker 
that  he  is  not  taking  risks.  One  person  will  make  a  more 
convincing  showing  of  the  same  case  than  another,  but 
if  a  man  does  not  have  his  affairs  in  an  orderly  condi- 
tion, or  show  a  good  grasp  of  them,  that  in  itself  argues 
against  him  as  a  credit  risk.  In  these  days  of  keen  com- 
petition, there  is  a  presumption  against  the  success  of 
any  one  who  does  not  have  a  good  grasp  of  the  details 
of  his  business.  The  man  whose  affairs  are  in  confusion, 
who  does  not  have  fresh  and  detailed  inventories,  who 
neglects  his  collections,  who  is  careless  about  insurance, 
who  does  not  systematically  calculate  his  costs,  and,  in 
short,  who  does  not  keep  his  affairs  in  perfectly  intel- 
ligible condition,  is  not  deserving  of  credit,  and  in  most 
cases  will  not  obtain  it. 

CHARACTER  is  the  foundation  of  credit;  assurance 
that  the  charari'>r  of  an  a'p'plicant  for  a  loan  war- 
rants trust  is  the  banker's  first  consideration. 

The  first  thing  to  be  known  about  a  proposed  loan  is 
the  character  of  the  borrower.  The  banker  is  entitled  to 
a  full  history  of  his  business.     He  is  entitled  to  know 


BANK    LOANS  163  ^ 


how  he  has  paid  his  debts,  how  he  has  kept  his  promises, 
if  his  expectations  are  based  upon  knowledge  and  intelli- 
gent forecasts  or  upon  mere  guesses.  The  business  man 
in  applying  for  a  loan  should  be  careful  to  show  up  these 
facts  upon  his  own  initiative.  If  he  is  a  recent  arrival 
in  the  community  he  should  show  what  his  record  has 
been  in  the  place  where  he  formerly  lived.  If  he  has 
never  been  in  business  for  himself,  he  should  show  what 
his  personal  record  has  been  in  someone's  employ.  No  J 
one  can  expect  to  borrow  money  without  showing  his 
personal  worthiness,  as  established  by  years  of  upright 
life,  and  the  more  promptly  and  fully  he  shows  this  up, 
without  being  pressed  for  it,  the  more  favorable  the  im- 
pression he  will  make. 

Together  with  personal  character  for  integrity  and  re-  - 
liability,  the  banker  closely  associates  the    established 
character  of  the  borrower  for  business  capacity.     The 
borrower  must  show  what  his  experience  has  been  and 
what  success  he  has  had.     All  this  has  a  direct  bearing  j 
upon  his  claim  for  credit. 

Moreover,  the  borrower  must  have  a  proper  propor--^ 
tion  of  capital  of  his  own  in  the  business,  and  should  be 
able  to  show  that  what  he  borrows  from  the  bank  is  for 
temporary  use  and  will  correspondingly  increase  his 
quick  assets.  Everything  that  he  owes  the  bank  should 
be  offset  by  merchantable  stock  that  in  the  natural  course 
of  trade  will  be  moved  in  a  few  months.  It  is  not  pru- 
dent either  from  the  standpoint  of  the  borrower  or  of  the 
bank  to  have  the  bank  supply  money  for  investment  in 
plant  or  real  estate.  By  doing  this  the  borrower  places 
himself  in  a  position  where  he  might  be  obliged  to 
liquidate  his  whole  business  in  order  to  pay  a  short  time 
loan. 

The  employment  of  audit  companies  is  very  desirable 


164 FINANCE    AND    INVESTMENTS 

where  a  business  has  attained  considerable  magnitude,  so 
that  the  head  of  the  house  is  in  a  measure  dependent  for 
his  own  knowledge  of  conditions  upon  subordinates. 
There  is  always  the  possibility  of  irregularities  which 
.  escape  his  notice.  Banks  are  encouraging  their  custom- 
ers to  have  an  independent  audit  made  at  frequent  in- 
tervals. This  practice  inspires  confidence,  and  where  the 
accountants  are  capable  and  experienced  men  they  often 
are  able  to  give  valuable  advice  as  to  bookkeeping  and 
I  managerial  methods.  Finally,  if  a  man  expects  frequent 
accommodation  from  his  banker  he  must  be  open  and 
candid  in  his  representations,  recognizing  that  the 
former  has  a  right  to  know  all  about  his  business  and 
cannot  be  satisfied  with  generalities.  Nor  is  it  well 
to  change  bankers.  Build  up  with  one,  borrow  only 
from  him,  and  let  him  be  assured  that  he  is  your  only 
creditor.  If  his  advice  seems  unnecessarily  conservative 
at  times,  remember  that  you  are  likely  to  be  a  little 
biased  on  the  side  of  your  business,  and  that  he  judges 
by  the  record  as  it  is.  Too  many  men  seem  to  be  lack- 
ing in  power  of  analysis,  or  the  concentration  required 
for  a  close  knowledge  of  details.  Too  many,  when  it 
comes  to  the  test,  are  lacking  in  knowledge  of  their  own 
business,  or  are  trying  to  fool  themselves  about  it,  un- 
willing to  face  unwelcome  facts.  It  is  usually  fortunate 
for  themselves  as  well  as  for  everybody  else  concerned, 
if  the  banker  detects  their  incompetence  and  denies  the 
accommodations  they  want. 

The  information  demanded  by  the  banker  is  verified 
and  supplemented  by  the  information  that  tlie  bank  ob- 
tains through  its  own  investigation. 

Fifteen  years  ago  the  credit  manager  was  almost  un- 
known. Today  the  systematized  credit  department  is  the 
nerve  center  of  every  thoroughly  organized  bank;  and 


BANK    LOANS  165 


the   plan  is  spreading   rapidly   to   the   smaller   banks. 

What  the  president  and  cashier  formerly  carried  in 
their  heads,  the  credit  department  now  carries  in  its 
files — and  vastly  more. 

There  are  so  many  facts  to  be  taken  into  account,  so 
many  influences  that  might  affect  a  loan,  that  the  credit 
departments  of  the  large  banks  are  organized  with  the 
greatest  care.  This  organization  embraces  a  system  for 
gathering  and  filing  statements,  records  and  reports,  and 
the  men  who  turn  an  x-ray  on  those  statements  and 
determine  when  a  customer  is  entitled  to  credit  and  when 
further  loans  must  be  refused. 

One  of  the  important  functions  of  the  credit  depart- 
ment is  known  as  " statistical' '  and  the  data  that  it 
gathers  for  the  bank  would  be  a  revelation  to  the  ma- 
jority of  customers. 

The  information  which  the  credit  department  desires 
is  literally  unlimited ;  any  fact  related  to  the  indi- 
vidual's  past  record,  the  condition  of  his  business,  his 
personal  habits,  his  integrity,  his  domestic  life — nothing 
is  too  trivial  to  have  bearing  on  the  case.  On  the  one 
hand  the  bank  must  guard  against  questionable  loans; 
on  the  other  hand  it  must  be  equally  careful  not  to  offend 
an  influential  business  man  by  denying  him  accommoda- 
tion to  which  he  is  entitled.  To  steer  this  department  in 
safety,  the  channel  of  business  life  must  be  charted  with 
infinite  precision  and  the  changes  made  by  the  current 
from  day  to  day  must  be  known  to  the  pilot. 

A  common  characteristic  of  borrowers  is  self-deception. 
"When  a  man  succeeds  in  fooling  himself,  he  will  try  to 
fool  the  bank.  If  he  admits  the  truth  himself,  ordi- 
narily he  will  set  it  forth  in  his  statement. 

A  merchant  made  verbal  application  for  a  loan.  Dur- 
ing the  conversation  he  stated  that  he.  carried  a  stock 


166 


FINANCE    AND     INVESTMENTS 


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FORM  VI:  At  the  left  are  shovm  the  first  and  third  pages  of  the  state- 
ment blank  used  by  the  State  Bank  of  Chicago.  This  shows  the  line  of 
information  demanded  from  applicants.     Page  three  of  this  blank  provides 


BANK    LOANS 


167 


riLLALk  SLANKS,  WItlTING  "NO"  OR  "NONE"  WHERK  NECESSARY  TO  COMPLCTC  INFORMATION 


JPON  RCBISCOUNTEO  SILLS  HCCCIVABLt. 
JPON  «CROMMOD«TION    INDOnftMCNT  . 

«««t  f OU  •*)*  eONtiMatwt  luaiLiTiCM    ^    upoh  notes  cxohancco  with  othcds  . 

rOR  GUANAMTCES  _________ 


TOTAL  AMOONT  O*  SILLS  HeCtlVASUC  DISCOUNTED' AT  BANKS  OR  SOLD  BEARINO  TOUR  ENDORSCMENT. 
•  *(  ALLSJI0MibOOV«TrvL*S«CTS  CXCLUOED  rROM  ABOVE  STATtMENTt  ________^_____ 

WHAT  A HOVHrer  SILLS  OA  ACCOUNTS  RECEIVABLE  IS  l»AST  DUE  OR  EUTSWDED*-. 


1ET8  M.tOOCeAS  SCCUniTTrOR  loans  ADVANCISOR  OTHER  LIABILITIEBI. 


«RE  ANT  or  TOO*  SIL'.S  PATABLf  SECunEOt  __ 
■VERAOf  AMOUNT  Of  MERCHANOtSE  CARRIEO.S  . 


,  ir  BO.  WHAT  AM0UNT1  •  , 


___ TOTAL  SALES  TOR  LASTinSCAl  TEAR,  S  . 

AMOunrorriRtmSuRAMsr  on  suiLomas  and  —  '"*  »  «■■  m.»«-m»mi>.«.  .^ 

DATE  or  »««TMf««M..A«jir«M.i.T 
•rM(HeOE%lT  'V»'«J* 


BENERAL  PARTNERS 


NAME 

•ODRESS 

WORTH 
OUTSIDE  or  BUSINESS^ 

NAMES  or  SPtCIALR&RTNCRk  ■ 

AMOUNT  or  aVCOIAL  CAMTAL,  ST  WHOM  CONTRIBUTEO,  AND  UNTIL  WHAT  DATI1 . 


ttlWE  NAMU  or  ALL  SANKS  WHERE  ACCOUNTS  ARE  HEFT  . 


eittMAMCB  or  ALL  BANKS  WMCRC  ACCOUNTS  HAVE  BEEN  Wf>T  . 


BBS  or  BROKERS  HANDLING  TOUR  NOTES  . 


flEQUUIR  TIMES  or  BALANCINC  BOOKS  -______^___^_____ 

REGULAR  Ti««r«n>T»Mii»ftmvn»Tf.a» 

BTATCIAST  OATC  or  TAKING  TRIAL  BALANCE  AND  ir  SAME  PROVED. 

HAVE  TOU  EVEB  TAILED  IN  BUSINESS  ■ 


space  for  statements  of  stocks,   bonds  and  investments  and  the  names  of 
concerns  from,  whom  goods,  merchandise  and  material  are  purchased 


168  FINANCE    AND    INVESTMENTS 


worth  $40,000.    He  was  given  a  blank  to  fill  out.    When  i 
he  came  to  the  item  *' Merchandise"  he  hesitated,  for 
under  this  line  in  small  italics^  was  the  qualification: 
'*How  valued  r* 

He  laid  down  his  pen  and  meditated.  Then  he  figured 
a  moment  on  the  pad,  and  finally  entered  his  merchandise 
item  as  $24,000,  instead  of  $40,000.  The  latter  was  the 
retail  valuation,  and  included  his  unearned  profit.  He 
had  been  deluding  himself  with  the  belief  that  he  ac- 
tually had  $40,000  in  goods.  When  the  banker  saw  the 
statement,  he  remembered  the  valuation  the  applicant 
had  put  on  his  stock  and  called  his  attention  to  the  dis- 
crepancy. The  borrower  had  to  confess  that  he  had 
talked  loosely.  It  is  vastly  better  to  get  down  to  cold 
facts  at  the  very  beginning.  To  do  it  under  pressure  les- 
sens confidence. 

WHAT  specific  information  is  required  of  an  appli- 
cant for  a  bank  loan;  the  character  of  the  informor 
tion  demanded;  the  details  of  the  statement  blank. 

In  gathering  its  information  the  credit  department  has 
three  sources:  the  statement  rendered  by  the  applicant 
for  a  loan ;  the  record  of  the  account  in  previous  months 
and  years;  and,  finally,  the  reports  from  mercantile 
agencies  and  facts  that  can  be  obtained  independently 
of  the  bank's  records  and  the  interested  person. 

In  applying  for  a  loan  a  borrower  is  requested  to  fill 
out  a  blank,  giving  specific  information  concerning  his 
assets  and  liabilities — questions  that  "must  needs  give 
him  pause"  unless  his  business  is  in  shape  to  make  at 
least  a  fair  showing.  Separate  forms  are  usually  pro- 
vided for  individuals,  co-partnerships  and  corporations, 
although  naturally  many  of  the  questions  are  the  same 
in  all  forms.    The  blank  used  by  the  State  Bank  of  Chi- 


BANK    LOANS  16» 


cago  (Form  VI)  shows  the  line  of  information  which  the 
customer  is  expected  to  furnish;  the  failure  to  answer 
any  question  merely  serves  to  arouse  suspicion  and  is 
certain  to  hold  up  the  application  pending  further  inves- 
tigation. 

Once  a  year  or  oftener  these  statements  must  be  re- 
vised and  an  emphatic  clause  in  all  of  them  requires  the 
borrower  to  notify  the  bank  at  once  of  anything  that 
changes  his  standing  as  to  assets  or  liabilities. 

The  degree  of  detail  varies  with  different  banks.  Some 
peculiar  experience,  perhaps,  induces  one  bank  to  ask 
questions  not  deemed  important  by  others.  Sometimes  a 
blank  statement  will  show  extraordinary  minuteness,  for 
example,  in  matters  pertaining  to  previous  history.  A 
record  is  perhaps  required  of  all  former  enterprises, 
names  of  all  banks  where  previous  accounts  have  been 
kept  or  where  money  has  been  borrowed;  names  of 
brokers  dealt  with  during  a  decade,  names  of  all  large 
creditors  of  the  past,  and  all  partners  and  others  con- 
nected in  a  prominent  way  with  earlier  enterprises. 

The  National  City  Bank,  in  gathering  credit  informa- 
tion places  great  stress  on  everything  that  shows  the 
borrower's  integrity,  no  matter  what  that  information 
may  be ;  next,  it  ranks  ability,  and  places  tangible  assets 
last.  The  Corn  Exchange  Bank  of  Chicago,  asks,  among 
other  liability  items:  ''Due  to  wife  or  relatives  in  any 
form  of  obligation?"  This  bank  aims  to  guard  against 
entanglement  resulting  from  family  litigation  and 
claims.  Some  banks  ask  specific  information  about 
credit  insurance  carried  and  life  insurance  payable  to 
company;  others  want  a  valuation  placed  on  "good  will, 
patterns  and  patents."  The  State  Bank  of  Chicago,  for 
instance,  requires  the  borrower  to  agree  in  writing  that 
should  he  become  insolvent,  or  commit  any  act  of  bank- 


VtO  FINANCE    AND    INVESTMENTS 

ruptcy,  or  if  his  representations  are  untrue,  or  if  he 
fails  to  notify  the  bank  of  material  change,  all  obliga- 
tions held  by  the  bank  are  to  become  due  and  may  be 
charged  against  the  deposit  balance.  From  its  own 
books  the  bank  compiles  a  condensed  statement  showing 
the  average  balances  and  maximum  loans  from  month  to 
month. 

The  average  statement  required  by  a  city  bank  makes 
a  borrower  dig  down  to  the  blunt  reality.  He  may  have 
been  deluding  himself,  but  if  he  answers  the  questions 
honestly  he  often  finds  he  must  discount  his  former  esti- 
mates heavily. 

Borrowing  money  at  a  bank  is  something  like  selling. 
Delusions  no  longer  count.  What  the  bank  wants  to 
know  is  rock  bottom  facts.  Although  sometimes  even  the 
bank  may  be  deceived,  the  modern  credit  department  is 
steadily  lessening  the  danger. 

Between  commercial  bank  credit  and  credit  from  the 
jobber  and  manufacturer  there  is  a  fairly  close  analogy. 
Quick  assets  are  the  basis  for  figuring  both,  though 
real  estate  and  the  money  invested  in  buildings  and 
equipment  are  also  taken  into  consideration  in  fixing  the 
amount  of  accommodation  granted  to  a  borrower. 

"D  ANKS  consider  the  moral  risk  important.  Information 
^  comes  from  many  sources.  Sometimes  a  strap  bit  of 
news  is  received  by  accident;  sometimes  the  bank  sends  out 
to  gather  desired  facts.  If  anything  transpires  to  aroiise 
suspiciony  the  moral  risk  is  investigated  by  special  agents. 
Integrity  and  ability  play  parts  as  conspicuous  as  tangible 

^  assets.    Many  business  men  place  chief  dependence  on  their 

T  property — and  commonly  put  their  fixed  assets  ahead  of 
liquid  assets.  As  a  matter  of  fact,  the  bank  looks  upon 
liquid  assets  as  far  more  significant  that  property  such  as 
real  estate  and  equipment  which  cannot  be  quickly  turned 

\    into  cash. 

^  —Edward  Mott  Woolley 


XVII 

THE  BANKER'S  CREDIT 
VIEWPOINT 

By  George  M.  Reynolds 
rresident.  The  Continental  and  Commercial  National  Bank 

EXTENSIONS  of  credit  to  one  of  its  customers  a 
bank  bases  on  the  assurance  that  the  borrower 
could  pay,  when  called  upon  to  do  so,  out  of  his  quick 
assets. 

Bank  or  short-time  credits  do  not  contemplate  that 
the  proceeds  of  such  loans  should  become  a  part  of  the 
fixed  capital  in  the  borrower's  business,  but  rather  that 
they  shall  constitute  the  increase  in  capital  necessary  for 
the  conduct  of  the  business  during  a  portion  of  the  year 
where  the  full  amount  employed  is  not  necessary  or  can- 
not be  used  profitably  throughout  the  entire  year. 

A  bank  loans  money  to  a  business  man  only  for  tem- 
porary purposes,  and  when  it  will  increase  the  liquid 
assets  of  the  borrower  so  that  a  quick  turnover  will  en- 
able him  to  pay  the  loan.  Therefore,  the  amount  of 
credit  to  be  extended  must  depend  very  largely  upon 
the  amount  of  quick  assets  possessed  by  the  applicant. 

Although  there  is  no  definite  rule  covering  the  per- 
centage of  quick  assets  to  total  liabilities  required,  still, 
from  the  banker  *s  point  of  view,  the  applicant  should 
possess  two  dollars  or  more  of  quick  assets  to  one  of 
liability.  The  only  basis  for  a  bank  loan  is  a  volume  of 
quick  assets  sufficient  to  take  up  the  loan  and  leave 
enough  surplus  quick  assets  to  protect  the  business. 


172  FINANCE    AND    INVESTMENTS 


A  borrower's  fixed  assets — such  as  his  investment  in 
land,,  buildings,  machinery,  equipment — are  not  con- 
sidered by  the  bank  as  a  direct  factor  in  determining  the 
advisability  or  the  size  of  a  loan  to  him.  Fixed  assets 
have  a  bearing;  they  help  determine  the  standing,  the 
stability  and  the  ultimate  worth  of  the  borrower.  But 
they  do  not  enter  into  this  one  important  question  the 
banker  asks:  ''What  will  pay  this  loan  promptly  at 
maturity  ? ' '  Prompt  payment  of  a  short-time  loan  must 
come  out  of  surplus  liquid  assets. 

QUICK  assets  should    at    all    times    exceed  quick 
liabilities — this  is  necessary  from   the   viewpoints 
of   both    the    borrower    and    the    lender. 

An  applicant  for  a  loan  whose  margin  of  quick  as- 
sets over  quick  liabilities  is  not  more  than  one-half,  is 
not  held  by  a  bank  to  be  as  desirable  as  where  the  per- 
centage is  greater ;  for,  if  there  is  not  a  sufficient  margin 
of  quick  assets,  a  borrower,  should  he  be  forced  to  pay 
quickly,  might  find  it  impossible  to  do  so  without  serious 
damage  to  his  business.  So,  from  the  banker's  point  of 
view  it  is  desirable  that  borrowers  should  possess  quick 
assets,  in  excess  of  the  liabilities,  at  least  equal  to  the 
loan,  for  that  insures  the  borrower's  ability  to  pay, 
should  he  be  called  to  do  so. 

Loans  made  to  concerns  whose  percentage  of  quick 
assets  is  not  largely  in  excess  of  the  liabilities,  for  all 
practical  purposes,  put  the  bank  in  the  attitude  of  fur- 
nishing money  to  be  used  as  capital  stock  in  the  busi- 
ness of  the  borrower.  And  it  certainly  is  not  the  pro- 
vince of  a  bank  to  do  this.  To  avoid  this  a  bank  insists 
that  the  borrower  shall  have  a  sufficient  excess  of  quick 
assets  over  all  his  liabilities  to  enable  him  to  repay  the 
loan  without  impairment  to  his  business  and  without  the 


SATISFYING    THE    BANK 173 

bank's  being  forced  to  take  the  time  to  collect  the  loan. 
Either  of  these  results  might  occur  if  the  borrower  had 
to  pay  the  loan  in  part  or  in  whole  from  his  capital,  rep- 
resented by  his  fixed  investments. 

As  a  general  principle,  a  loan  is  protected  and  a 
prompt  payment  insured  only  by  maintaining  a  ratio 
of  at  least  two  or  more  of  quick  assets  to  one  of 
quick  liabilities.  The  surplus  of  assets  should  at  least 
equal  the  amount  of  the  loan.  The  difference  between 
the  two  establishes  the  net  worth  of  the  borrower  and 
his  ability  to  pay  quickly,  from  the  bank's  standpoint — 
the  net  that  makes  it  possible  for  the  bank  to  get  its 
money  when  payment  of  the  loan  is  demanded. 

This  ratio  is  necessary  for  two  reasons.  Liquid  assets, 
like  all  assets,  have  a  tendency  to  shrink  under  liquida- 
tion, while  liabilities  remain  stable.  When  a  borrower's 
quick  assets  are  only  a  half  larger  than  his  liabilities, 
even  though  that  half  covers  his  loan,  yet  the  risk  may 
become  unsafe  because  the  margin  of  shrinkage  for  as- 
sets is  too  small. 

In  these  days  of  rapid  development  and  large  growth 
in  business,  the  tendency  is  to  require  greater  facilities 
for  the  conduct  of  business.  This  puts  a  constant  pres- 
sure on  the  borrower  to  convert  liquid  into  fixed  assets. 
Naturally  the  banker  is  inclined  to  discourage  this.  He 
believes  that  where  a  greater  equipment  is  necessary,  re- 
quiring a  larger  investment  of  money,  the  capital  of  the 
concern  should  be  increased  sufficiently  to  provide  the 
money  necessary  for  this  extension;  it  should  not  de- 
pend upon  the  proceeds  of  short  time  loans  for  promot- 
ing such  expansion. 

This  ratio  ignores  time  as  an  element  in  the  loan. 
For  if,  when  the  loan  comes  due,  the  borrower  still  main- 
tains a  proper  margin  of  quick  assets  to  liabilities  the 


174  FINANCE    AND    INVESTMENTS 

banker  has  no  hesitancy  in  extending  the  loan ;  the  risk 
is  just  as  good  as  it  was  when  accepted ;  the  loan  is  still 
well  protected ;  payment  could  be  made  if  demanded. 

This  might  be  continued  indefinitely.  But  to  prove 
himself,  to  assure  his  actual  ability  to  pay,  and  to  pre- 
clude his  too  great  dependence  on  bank  funds,  the  bor- 
rower should  clean  up  periodically — pay  up  his  loan  and 
actually  show  his  excess  of  quick  assets  over  quick 
liabilities. 

REGULAR  cleaning  up  periods  show  the  banker  that 
his  loans  are  protected  and  prevent  borrotoers  from 
reducing  quick  assets  below  the  margin  of  safety. 

Cleaning  up  periods  will  vary  according  to  the  size 
of  the  business,  the  loan  and  the  character  of  the  in- 
dustry. A  reasonable  period  for  cleaning  up  is  every 
eight  months.  In  some  industries,  which  do  a  season- 
able business  requiring  a  full  year  for  a  complete  turn- 
over, a  yearly  clean-up  is  sufficient. 

These  rules  of  ratio  and  clean-up  have  their  excep- 
tions. There  are  industries  whose  turn-over  is  so  quick 
that  they  do  not  require  so  large  a  ratio  of  quick  assets. 
In  other  lines  there  are  seasons  when  more  ready  money 
is  required  than  such  a  ratio  allows,  and  so  there  may  be 
exceptions  to  the  rule  in  those  periods;  for  instance,  a 
grain  company,  during  crop-moving  time.  Sometimes  a 
merchant  has  a  chance  to  make  a  quick  turn  and  needs  a 
relatively  large  loan  for  a  short  time ;  knowing  his  con- 
dition and  just  what  he  is  going  to  use  the  money  for, 
the  banker  makes  an  exception  to  the  rule  by  accom- 
modating him.  In  fact,  circumstances  are  so  varied  that 
the  rule  is  just  as  dangerous  without  well  judged  excep- 
tions as  would  be  the  entire  ignoring  of  the  rule. 

After  the  clean-up  the  banker  should  require  a  full 


SATISFYING    THE    BANK 175 

statement  from  the  borrower,  for  this  tendency  to  con- 
vert liquid  assets  into  fixed  capital  is  strong  in  many 
lines  of  business.  A  concern  has  $100,000  in  fixed  as- 
sets, $60,000  in  quick  assets  and  $30,000  in  quick  liabili- 
ties. It  borrows  $20,000  from  the  bank.  This  is  likely 
to  release  some  of  the  quick  assets  and  immediately  the 
demand  for  a  greater  equipment  creates  a  tendency  to 
convert  some  of  those  quick  assets  into  fixed  assets. 

The  borrower  gets. the  idea  that,  since  his  volume  of 
fixed  assets  is  large,  the  loan  can  run  indefinitely;  and 
when  clean-up  time  comes  his  banker  finds  the  bank^s 
funds  are  being  used  as  a  part  of  the  working  capital  of 
the  concern.  The  proportion  of  quick  assets  to  liabili- 
ties has  grown  smaller  than  at  the  time  the  loan  was 
made ;  in  this  case  the  payment  of  the  loan  may  necessi- 
tate liquidation  of  some  of  the  fixed  capital  in  order  to 
restore  the  proper  ratio.  And  to  do  this  may  require 
considerable  time  or  result  in  embarrassment  to  the  bor- 
rower. 

A  proper  margin  of  quick  assets  to  liabilities  is  always 
a  factor  of  safety.  It  should  exist  at  all  times,  and  the 
bank  can  prove  if  it  is  being  maintained  by  testing  the 
borrower's  ability  to  pay,  by  calling  the  loan. 

The  test  of  the  ability  to  pay  is  the  excess  of  quick 
assets  against  quick  liability.  It  should  be  the  measure 
of  borrowing  power. 

/^NE  achievement  of  the  bank  credit  department  has  been 
^^  a  raising  of  the  standard  of  business.  Men  who  have 
to  answer  rightly  the  questions  put  to  them  by  the  bank,  and 
live  up  to  the  rules  of  the  code,  are  sure  to  be  better  business 
men  and  build  stronger  businesses.  It  really  has  helped  the 
borrower  as  muck  as  the  lender, 

— Edward  Mott  WooUey 


XVIII 

BANK   COOPERATION   ON 
FINANCIAL  PROBLEMS 

By  E.  B.  Kixmiller 

A  FOOD-PRODUCT  manufacturer  in  a  western  city 
had  greatly  increased  his  volume  of  business.  He 
believed  himself  in  good  financial  condition,  and  was 
looking  forward  to  a  good  dividend.  Yet  when  the 
profit  and  loss  statement  was  laid  before  him  at  the  end 
of  the  last  quarter,  he  found  he  had  not  only  made  no 
progress,  but  had  barely  played  even. 

His  investigation  failed  to  uncover  the  leak.  When 
he  went  to  his  banker  to  clean  up,  he  talked  the  situa- 
tion over  with  him.  The  banker  offered  to  send  an 
auditor  to  the  factory  to  look  over  the  business  and  make 
a  report  to  him.  The  recommendations  of  the  banker 
would  be  determined  by  the  figures  showing  the  manu- 
facturer's condition. 

The  manufacturer  had  already  explained  that  because 
of  lack  of  capital,  flour,  the  chief  material  used  in  the 
manufacture,  was  bought  in  small  quantities  intermit- 
tently. Flour  fluctuated  between  $4.75  and  $6.00  a  bar- 
rel. If  the  manufacturer  could  buy  his  supply  for  the 
year  somewhere  near  the  bottom  price,  a  big  saving 
would  result.  The  bank  offered  to  keep  the  manufac- 
turer advised  of  general  conditions  and — ^what  was  even 
more  helpful — to  extend  accommodations  at  the  most  op- 
portune time  for  purchasing.     The  saving  here  alone 


BANK    SERVICES 177 

was  enough  to  start  the  factory  on  a  substantial  divi- 
dend paying  basis. 

The  bank's  representative  also  found  that  the  concern 
was  missing  profits  by  not  taking  discounts,  and  that 
losses  from  bad  credits  were  abnormal.  The  bank  ar- 
ranged to  extend  the  manufacturer  a  sufficient  line  to 
enable  him  to  discount  his  bills  payable,  taking  as  col- 
lateral such  of  the  concern's  bills  receivable  as  were 
good,  and  to  get  credit  information  on  customers  whom 
the  manufacturer  considered  doubtful  or  about  whom  he 
wanted  facts  that  could  not  be  obtained  through  ordi- 
nary sources. 

The  next  year  the  factory  declared  a  dividend  and  put 
away  a  surplus. 

That  is  what  one  bank  did  for  its  customer — willingly 
and  effectively.  This  manufacturer  did  not  look  upon 
his  bank  merely  as  a  vault  in  which  he  deposited  money, 
and  to  which  he  went  to  plead  loans.  He  found  the  bank 
was  ready  to  assume  its  responsibility  as  an  advisory 
partner  to  its  patrons. 

INSTANCES  that  show  how  business  men  have  used 
banks  to  help  solve  business  problems;  securing  the 
bank's    cooperation    in    collecting   past    due    accounts. 

The  services  the  bank  can  offer  are  as  varied  as  the 
different  lines  of  business  it  serves.  It  can  help  almost 
everywhere;  it  can  advise,  safeguard,  protect — ^help 
raise  money,  enlarge  trade,  decrease  expense,  and  in- 
crease profits. 

At  one  time,  a  lumber  concern  in  the  Northwest  offered 
a  shipper  in  a  distant  town  its  note  for  $2,000  at  three 
months.  The  concern  was  one  of  the  largest  in  its  terri- 
tory, supposed  to  be  well  rated  and  prosperous.  One 
would  unhesitatingly  take  such  paper  as  a  good  risk. 


178  FINANCE    AND    INVESTMENTS 

But  this  shipper  believed  in  keeping  in  touch  with  his 
bank.  So  before  accepting  the  note  he  took  the  matter 
up  with  his  banker.  The  banker  advised  deferring  ac- 
tion and  immediately  wrote  the  correspondent  bank  in 
the  lar^e  city  where  the  lumber  business  was  located.  Its 
credit  department  started  an  investigation.  It  was 
found  that  the  lumber  company  carried  a  substantial  bal- 
ance in  its  depositing  bank  and  that  ordinarily  the  bank 
would  discount  its  bills  receivable.  Yet  the  bank  ac- 
corded it  no  line  of  credit.  And  further  investigation 
revealed  that  the  trade  generally  gave  the  company  no 
credit.  Other  confidential  information  of  a  derogatory 
nature  was  secured. 

The  country  banker  advised  his  customer  to  deal  on  a 
cash  basis.  The  lumber  concern  failed  the  week  follow- 
ing. The  shipper,  although  he  did  not  know  the  method 
of  securing  the  credit  information  through  the  chain  of 
financial  institutions,  realized  forcibly  that  his  policy  of 
verifying  his  paper  at  his  bank  had  saved  him  money. 

The  bank  often  makes  a  most  effective  collection 
agency.  By  virtue  of  his  position,  the  banker  is  familiar 
with  the  business  of  every  one  in  his  locality  and  knows 
the  most  likely  method  of  getting  payment.  Nearly 
every  man  will  pay  his  bank  in  order  to  maintain  his 
bank  credit  standing. 

A  chronic  case  of  slow-pay  in  a  small  town  was  brought 
to  terms  in  a  short  time  by  means  of  the  pressure  a 
bank  brought  to  bear.  The  creditor  had  placed  the  ac- 
count in  the  hands  of  collection  agencies  without  any  re- 
sults. Finally  he  sued  and  won  judgment.  He  was 
then  no  better  off  than  before.  His  debtor  was  execution 
proof. 

The  matter  was  turned  over  to  the  local  bank.  The 
first  request  on  the  part  of  the  cashier  met  with  no  more 


BANK    SERVICES 170 

success  than  the  previous  demands  of  the  creditor. 
About  a  month  later  the  debtor  wanted  to  raise  some 
cash.  He  came  to  the  bank  with  a  good  note  and  asked 
to  have  it  discounted.  The  cashier  politely  informed 
him  that  the  previous  bill  would  have  to  be  paid  before 
the  bank  would  advance  the  money.  The  cash  was  a 
necessity,  so  the  bill  was  paid. 

HOW  a  manufacturer  used  the  bank  to  secure  in- 
formation  on  conditions,  the  acquircTuent  of  which 
required  an  organization  extending  over  the  entire  country. 

Sometimes  a  concern  wants  a  mass  of  detailed  in- 
formation the  acquirement  of  which  needs  a  big  organi- 
zation with  country-wide  ramifications.  The  bank  is  the 
best  source — and  willing  to  undertake  the  task.  This  in- 
volves the  service,  not  of  one  bank,  but  of  a  group. 

A  structural  iron  house  wanted  to  know  the  condi- 
tions of  the  building  industry  over  the  entire  country. 
Exact  knowledge  was  essential  in  signing  its  contracts 
which  ran  six  months  or  more  in  advance. 

One  of  the  concern's  depositing  banks  was  made  the 
medium  for  gathering  the  information.  Inquiries  were 
sent  to  its  correspondents  throughout  the  country ;  these 
in  turn  went  to  their  sources  of  news.  These  exact  facts, 
together  with  bankers'  statements  regarding  general 
business  conditions  and  prospects  all  came  to  the  deposit- 
ing bank.  There  the  facts  were  classified  and  analyzed, 
and  a  detailed  report  made  to  the  iron  company. 

The  service  for  which  the  bank  is  most  frequently 
called  on  is  the  raising  of  .uoney.  The  ability  of  the 
bank  itself  to  help  a  business  man  with  its  own  funds  is 
limited  by  its  size,  by  law,  by  proper  banking  principles. 
But  by  its  advice  and  service  it  can  go  far  beyond  this. 

A  medium-sized  concern  which  had  been  running  along 


180 FINANCE    AND    INVESTMENTS 

with  good  profits  and  moderate  growth  which  it  could 
finance  out  of  its  profits  found  its  business  expanding  so 
fast  that  it  needed  more  capital.  The  bank  carrying  its 
account  was  asked  for  advice.  The  banker  explained 
that  the  corporation  had  open  to  it  three  methods  of  rais- 
ing money;  an  increase  in  its  capital  stock;  an  issue  of 
bonds — creating  a  funded  debt;  an  issue  of  paper- 
creating  a  floating  debt.  The  advice  of  the  banker  was 
the  issue  of  more  capital  stock.  That  choice  was  based 
on  the  unbalanced  statement  the  corporation  showed  at 
the  time :  the  capital  stock  was  too  small  for  the  volume 
of  business  done;  the  surplus  was  too  large.  Because 
the  latter  might  have  been  drawn  down  by  declaring  it 
out  in  dividends  so  as  to  leave  only  a  meager  basis  on 
which  to  carry  the  business,  the  firm,  although  perfectly 
solvent,  was  not  regarded  as  a  desirable  risk.  By  issuing 
the  stock  along  the  lines  suggested  by  the  bank  the  cor- 
poration was  able  to  raise  the  funds  it  needed,  to 
secure  a  working  cash  capital,  and  to  present  a  well-bal- 
anced statement. 

Another  business  wanted  five  hundred  thousand  dol- 
lars to  build  a  new  foundry.  The  statement  showed  a 
proper  proportion  of  capital  stock  and  surplus.  The 
owners  did  not  desire  to  increase  the  capital  stock  be- 
cause their  profits  were  large  and  they  believed  they 
could  pay  for  the  new  foundry  out  of  their  profits.  The 
company  could  put  aside  at  least  $55,000  a  year  plus  the 
interest  on  the  required  loan  without  cutting  dividends. 

But  a  loan  of  such  large  amount  could  not  well  be 
made  by  the  bank ;  besides,  if  called  on  suddenly  for  re^ 
payment,  the  company,  although  solvent,  might  experi. 
ence  difficulties.  A  distribution  of  the  firm's  paper  was 
open  to  the  same  objection,  for  such  loans  must  be  short- 
time,  and  liable  to  sudden  contraction  in  case  of  tighten- 


SANK    SERVICES 181 

ing  up  of  the  money  market.  Under  the  circumstances 
a  bond  issue  was  the  only  method  of  securing  the  money, 
and  of  protecting  the  borrower  from  pressure  at  inop- 
portune times.  The  earning  power  of  the  concern, 
backed  by  sufficient  assets,  made  its  bonds  a  sound  invest- 
ment. The  banker  was  willing  to  help  to  the  extent  of 
underwriting  them.  The  underwriting  by  the  bank  as- 
sured the  security  of  the  issue  and  evidenced  the  bank's 
willingness  to  loan  a  purchaser  on  the  bonds.  Under 
these  circumstances  no  difficulty  was  met  in  selling  the 
securities.    The  needs  of  the  concern  were  satisfied. 

A  country  bank  was  able  to  aid  in  the  disposition  of 
short-time  paper  for  a  firm  requiring  a  larger  loan  than 
the  law  permitted  a  single  institution  to  carry.  Condi- 
tions did  not  require  a  bond  issue.  To  the  extent  that 
the  bank  could  loan,  accommodations  were  accorded. 
The  company  was  then  referred  to  the  bank's  city  cor- 
respondent broker  with  a  recommendation  from  the 
bank.  That  stamp  of  approval  is  important  for  the  ne- 
gotiation of  any  paper.  It  is  the  evidence  of  the  sound- 
ness of  the  borrowing  concern  that  guides  the  banks  pur- 
chasing the  paper. 

CONSULTATION  mth  the  banker    before   buying 
saved  one  investor  from  a  heavy  loss  by  revealing  a 
hidden  disadvantage  in  an  issue  of  investment  bonds. 

A  bond  issue  was  floated  on  an  office  building  in  a 
western  city,  the  income  of  which  was  four  times  the 
amount  of  the  interest  on  the  bonds.  The  building  was 
on  a  leasehold  of  long  term,  the  larger  portion  of  which 
was  yet  to  run.  With  all  these  elements  the  proposition 
looked  most  desirable.  It  sounded  especially  fine  when 
termed  a  first  mortgage  lien  on  rental  income,  building 
and  leasehold. 


182 FINANCE    AND    INVESTMENTS 

One  investor  sought  the  advice  of  his  banker  before 
buying.  The  result  of  a  thorough  investigation  revealed 
a  vital  defect  that  would  be  likely  to  pass  unnoticed  by 
even  the  most  careful  investors.  In  the  lease  there  was 
a  rental  revaluation  clause  calling  for  a  readjustment  of 
the  land  rent  changes  every  ten  years.  The  effect  of 
the  concealed  joker  was  obvious ;  with  a  building  situated 
on  increasingly  valuable  land  in  a  business  district  the 
lease-value  is  bound  to  rise  if  there  is  an  opportunity  for 
revaluation.  The  income  will  not  rise  in  anything  like 
the  same  proportion:  in  fact,  the  building  is  likely  to 
become  less  productive  as  newer  ones  are  erected.  The 
leasehold  itself  is  of  no  value  save  as  it  produces  income. 
With  the  income  liable  to  be  swallowed  up  in  an  increas- 
ing ground  rent,  the  assured  profit  becomes  doubtful. 
The  information  secured  from  the  bank  cost  the  investor 
nothing;  it  saved  him  much. 

When  the  southern  Indiana  coal  fields  were  on  the 
boom,  a  group  of  promoters  secured  options  on  a  large 
portion  of  the  farm  land  surrounding  one  of  the  more 
prosperous  towns.  The  coal  rights  in  the  land  were  in 
most  cases  bought  in  as  low  as  twenty-five  dollars  per 
acre.  A  few  farmers  went  to  their  banks  and  asked  for 
advice  of  the  cashier.  They  were  cautioned  to  hold  off 
signing  any  contract  until  such  time  as  they  could  can- 
vass the  situation  and  secure  the  best  terms  possible. 
Those  wise  enough  to  have  consulted  their  banker  ob- 
tained sixty-five  dollars  an  acre. 

More  important  even  than  the  increase  in  the  price 
secured  for  the  coal  right  was  the  advice  the  banker 
was  able  to  give  in  the  drawing  up  of  the  provision  of 
the  contract  concerning  oil  and  gas  royalties.  The  bank 
had  a  uniform  instrument  drawn  up  for  all  who  were 
selling  their  mineral  rights,  and  obtained  for  its  patrons 


BANK    SERVICES 183 

the  usual  rates,  while  many  others  sold  for  a  small 
royalty  or  none  at  all.  This  is  another  illustration  of 
the  innumerable  ways  in  which  the  bank  can  prove  of 
service  to  those  who  make  use  of  its  many  sided  ac- 
tivity. 

The  average  business  man,  no  matter  how  much  he 
may  know  about  his  own  business,  is  likely  to  be  ignorant 
of  the  conditions  prevailing  in  other  lines.  In  matters 
of  financial  importance,  and  in  questions  involving 
knowledge  of  conditions  foreign  to  his  own  business,  the 
banker's  advice  is  invaluable.  The  banker  is  at  the 
center  of  the  business  and  financial  activities  of  his  com- 
munity. His  advice  in  most  cases  marks  out  the  course  of 
safety,  and  his  services  may  mean  savings  and  increased 
profits. 


C!3 


^NE  of  the  most  important  causes  of  failure  is  the  over- 
^■^  drawing  of  credit.  Business  men  who  draw  against  a 
credit  which  has  not  been  securely  established  are  unable 
to  vxithstand  a  period  of  depression.  Men  who  incur  greater 
obligations  in  times  of  prosperity  than  their  finances  or 
prospects  warranty  on  the  assumption  that  their  business 
will  grow  sufficiently  to  enable  them  to  meet  the  obligations 
at  the  time  they  become  due,  are  successful  only  as  long  as 
that  prosperity  lasts.  If  an  unexpected  contraction,  in  the 
money  market  occurs  in  the  meantime,  the  strain  upon 
their  resources  is  greater  than  the  business  can  stand  and 
failure  results. 

— Alexander  J.  Hemphill 

Vice-President,  The  Guaranty  Trust  Company 


XIX 

HOW  TO  CHOOSE 
INVESTMENTS 

By  George  Garr  Henry 
Formerly  Vice-President,  Guaranty  Trust  Company 

WITH  the  immense  increase  and  more  general  dis- 
tribution of  wealth  in  the  United  States,  the 
problem  of  investment  has  assumed  great  importance. 
The  number  of  business  men  in  possession  of  funds  in 
excess  of  their  private  wants  and  business  requirements 
is  very  large;  and  richer  men,  to  whom  a  surplus  is  not 
a  new  thing,  have  found  their  available  funds  steadily 
and  quite  often  rapidly  increasing. 

The  problem  of  investment  thus  forced  upon  the  aver- 
age business  man  is  two-fold — it  concerns  the  safeguard- 
ing of  his  private  fortune  and  the  wise  disposition  of  his 
business  surplus. 

When  the  handling  of  a  man's  business  surplus  is 
spoken  of  as  an  investment  problem,  not  his  working 
capital,  which  should  be  kept  in  liquid  form  for  immedi- 
ate needs,  is  meant,  of  course,  but  that  portion  of  his  sur- 
plus which  is  set  aside  for  emergencies.  To  create  such 
a  surplus  is  the  established  policy  today  of  most  of  the 
well  conducted  and  successful  business  enterprises  in  this 
country. 

It  is  rightly  felt  that  the  possession  of  a  reserve  fund 
puts  the  business  upon  a  secure  foundation,  adds  to  its 
financial  strength  and  reputation,  and  greatly  increases 
its  credit  and  borrowing  capacity.    Moreover,  this  policy 


SELECTING    SECURITIES 185 

is  advantageous  not  only  for  large  corporations  like  the 
express  companies,  who  were  among  the  earliest  to  adopt 
it,  but  it  is  equally  advantageous  for  any  business,  no 
matter  how  small. 

SURPLUS  funds  are  best  disposed  of  by  investment  in 
securities — to  keep  them  in   bank  deposits  involves 
waste  and  tends  to  confusion  vrith  working  capital. 

The  recognition  of  this  fact,  combined  with  the  ability 
to  set  aside  a  reserve  fund,  has  brought  many  business 
men  face  to  face  with  the  problem  of  how  to  dispose  of 
it.  It  is  obviously  a  waste  of  income  to  have  the  surplus 
in  bank  accounts;  more  than  that,  there  is  a  constant 
temptation  to  use  it  and  to  confuse  it  with  working 
capital.  It  is  best  disposed  of,  plainly,  where  it  is  in- 
vested in  some  safe  interest-bearing  security,  which  can 
be  readily  sold  and  is  thus  available  for  use  if  necessity 
demands.    To  select  such  a  security  is  no  easy  matter. 

The  average  business  man  has  found  it  easier  to  make 
money  than  to  take  care  of  it.  Money  making  for  him 
is  the  result  of  successful  activity  in  his  own  line  of 
business,  with  which  he  is  thoroughly  familiar,  while  the 
investment  of  money  is  a  thing  apart  from  his  business, 
with  which  he  is  not  familiar,  and  in  which  he  may  have 
had  little  practical  experience.  His  failure  to  invest 
money  wisely  is  not  due  to  any  want  of  intelligence  or  of 
proper  care  and  foresight  on  his  part,  but  simply  be- 
cause he  is  ignorant  of  the  principles  of  a  business  which 
differs  radically  from  his  own. 

If  he  attempts  to  rely  on  his  own  judgment,  he  is 
almost  certain  not  to  do  the  best  thing,  even  if  his  busi- 
ness instinct  leads  him  to  avoid  those  enterprises  which 
are  plainly  unpromising  or  fraudulent.  It  should  be 
remembered  in  this  connection  that  widows  and  orphans 


186  FINANCE    AND    INVESTMENTS 


are  not  the  only  ones  ensnared  by  attractive  advertise- 
ments and  the  promise  of  brilliant  returns.  In  most 
cases,  widows'  and  orphans'  funds  are  protected  by  con- 
scientious and  conservative  trustees,  and  it  is  the  average 
business  man  who  furnishes  the  money  which  is  ulti- 
mately lost  in  all  propositions  which  violate  the  funda- 
mental laws  of  investment. 

The  average  man  is  led  into  these  unwise  investments 
through  a  very  natural  error  of  judgment.  Accustomed 
to  take  reasonable  chances  and  to  make  large  returns  in 
his  own  business,  he  fails  to  detect  anything  fundamen- 
tally wrong  in  a  proposition  simply  because  it  promises 
to  pay  well.  He  forgets  that  the  rate  of  interest  on  in- 
vested money,  or  pure  interest,  is  very  smaJl,  ajid  that 
anything  above  that  can  only  come  as  payment  for  man- 
agement, or  at  the  sacrifice  of  some  essential  factor  of 
safety  which  will  usually  lead  to  disaster. 

The  investment  of  money  is  a  banker's  business. 
When  an  investment  is  contemplated,  therefore,  the  aver- 
age business  man  should  consult  an  investment  banker, 
first  assuring  himself  of  the  entire  uprightness  and  re- 
liability of  his  adviser,  and  then,  after  making  a  general 
statement  as  to  the  nature  of  his  requirements,  putting 
himself  in  his  hands  for  the  selection  of  a  particular  in- 
vestment. 

Before  considering  the  general  factors  which  determine 
the  desirability  of  all  investments,  it  will  be  well  to 
present  clearly  the  fundamental  difference  between 
promises  to  pay  and  equities. 

Bonds,  real  estate  mortgages  and  loans  on  collateral 
represent  somebody's  promise  to  pay  a  certain  sum  of 
money  at  a  future  date ;  and  if  the  promise  be  good  and 
the  security  ample,  the  holder  of  the  promise  will  be 
paid  the  money  at  the  time  due. 


SELECTING    SECURITIES 187 

On  the  other  hand,  equities,  such  as  the  capital  stocks 
of  banking,  railway  and  industrial  corporations,  repre- 
sent only  a  certain  residuary  share  in  the  assets  and 
profits  of  a  working  concern,  after  payment  of  its  obli- 
gations and  fixed  charges.  The  value  of  this  residuary 
share  may  be  large  or  small,  may  increase  or  diminish, 
but  in  no  ca^  can  the  holder  of  such  a  share  require  any 
one,  least  of  all  the  company  itself,  to  redeem  the  cer- 
tificate representing  his  interest  at  the  price  he  paid  for 
it,  nor  indeed  at  any  price.  If  a  man  buys  a  $1,000  rail- 
road bond,  he  knows  that  the  railroad,  if  solvent,  will 
pay  him  $1,000  in  cash  when  the  bond  is  due.  But  if  he 
buys  a  share  of  railroad  stock  his  only  chance  of  getting 
his  money  back,  if  he  should  want  it,  is  that  someone 
else  will  want  to  buy  his  share  for  what  he  paid  for  it, 
or  more.  In  one  case  he  has  bought  a  promise  to  pay, 
and  in  the  other  an  equity. 

This  does  not  mean,  however,  that  equities  under  no 
circumstances  are  to  be  regarded  as  investments.  Many 
of  our  bank  and  railroad  stocks,  and  even  some  of  our 
public  utility  and  industrial  stocks  have  attained  a  sta- 
bility and  permanence  of  value  and  possess  sufficiently 
long  dividend  records,  to  justify  their  consideration 
when  investments  are  contemplated;  but  it  is  essential 
that  the  investor  should  have  a  thorough  understanding 
of  the  distinction  involved. 

DESIRABILITY  of  investments  depends  upon  four 
general  factors:  safety  of  principal,  interest  rate, 
convertibility  and  possibilities  of  appreciation. 

There  are  four  general  factors  which  determine  the 
desirability  of  all  investments.  These  are  (1)  safety 
of  principal  and  interest,  or  the  degree  of  assurance  of 
receiving  the  principal  and  interest  on  the  dates  due; 


188 FINANCE    AND    INVESTMENTS 

(2)  rate  of  income,  or  the  net  return  which  the  invest- 
ment makes  on  the  actual  amount  of  money  invested; 

(3)  convertibility  into  cash,  or  the  readiness  with  which 
it  is  possible  to  realize  on  the  investment;  and  (4) 
prospect  of  appreciation  in  value. 

Some  may  question  the  bearing  of  the  last  factor  on 
the  ground  that  appreciation  in  value  is  foreign  to  the 
idea  of  an  investment,  but  the  writer  prefers  to  retain 
it,  at  least  as  applied  to  investments  in  the  United  States, 
believing  that  one  is  entitled,  without  losing  his  char- 
acter as  an  investor,  to  share  in  the  growth  and  develop- 
ment of  a  new  country.  The  four  qualities  above  enumer- 
ated are  present  in  different  degrees  in  every  investment, 
and  the  scientific  investor  naturally  selects  those  securi- 
ties which  possess  in  a  high  degree  the  qualities  upon 
which  he  wishes  to  place  emphasis.  A  large  part  of  the 
problem  of  investment  lies  in  the  careful  selection  of 
securities  to  meet  one's  actual  requirements.  The  aver- 
age investor  does  not  thoroughly  understand  this  point. 
He  does  not  realize  that  a  high  degree  of  one  quality  in- 
volves a  lower  degree  of  other  qualities. 

He  may  have  a  general  impression  that  a  high  rate  of 
income  is  apt  to  indicate  less  assurance  of  safety,  but  he 
rarely  applies  the  same  reasoning  to  other  qualities. 
"When  he  buys  securities,  he  is  likely  to  pay  for  qualities 
which  he  does  not  need.  It  is  very  common,  for  ex- 
ample, when  he  wishes  to  make  a  permanent  investment 
and  has  no  thought  of  re-selling,  to  find  him  purchasing 
securities  which  possess  in  a  high  degree  the  quality  of 
convertibility.  From  his  point  of  view,  this  is  pure 
waste.  A  high  degree  of  convertibility  is  always  com- 
pensated for  by  the  sacrifice  of  some  other  quality — ^usu- 
ally rate  of  income.  With  more  care  in  his  selections  he 
could  probably  find  some  other  security  po^essing  equal 


SELECTING    SECURITIES 18£ 

safety  of  principal  and  interest  and  equal  promise  of 
appreciation  in  value,  which  would  yield  considerably 
greater  revenue,  lacking  only  ready  convertibility.  Thus 
he  would  satisfy  his  real  requirements  and  obtain  a 
greater  income,  at  the  expense  only  of  a  quality  which 
he  does  not  need. 

Generally  speaking,  the  private  investor  does  not  need 
to  place  much  emphasis  upon  the  quality  of  converti- 
bility, at  least  for  the  larger  part  of  his  estate.  On  the 
other  hand,  for  many  purposes,  ready  convertibility  is 
an  absolute  necessity,  and  in  order  to  secure  it,  some- 
thing in  the  way  of  income  must  usually  be  sacrificed. 

Again,  some  investors  are  so  situated  that  they  can 
insist  strongly  upon  promise  of  appreciation  in  value,, 
while  others  cannot  afford  to.  Rich  men,  whose  incomes 
are  in  excess  of  their  wants,  can  afford  to  forego  large 
immediate  returns  for  the  sake  of  appreciation  in  value. 
Such  men  naturally  buy  bank  and  trust  company  stocks, 
whose  general  characteristic  is  a  small  return  upon  the 
money  invested,  but  a  strong  likelihood  of  appreciation. 
This  is  owing  to  the  general  practice  of  well  regulated 
banks  to  distribute  only  about  half  the  earnings  in  divi- 
dends and  to  credit  the  rest  to  surplus,  thus  insuring  a 
steady  rise  in  the  book  value  of  the  stock.  Rich  men, 
again,  can  afford  to  take  chances  with  the  quality  of 
safety,  for  the  sake  of  greater  income,  in  a  way  which 
poor  men  should  never  do.  In  practice,  however,  it  is 
usually  the  poor  men  who  take  the  chances  and  lose 
their  money. 

In  the  quality  of  safety,  there  is  a  marked  difference 
between  safety  of  principal  and  safety  of  interest.  With 
some  investments  the  principal  is  much  safer  than  the 
interest,  and  vice  versa.  This  can  best  be  illustrated  by 
examples.    The  bonds  of  terminal  companies,  which  are 


190 FINANCE    AND    INVESTMENTS 

gTiaranteed  as  to  interest,  under  the, terms  of  a  lease  by 
the  railroads  which  use  the  terminal,  are  usually  far 
safer  as  to  interest  than  as  to  principal.  While  the 
lease  lasts,  the  interest  is  probably  perfectly  secure,  but 
when  the  lease  expires  and  the  bonds  mature,  the  rail- 
roads may  see  fit  to  abandon  the  terminal  and  build  one 
elsewhere,  if  the  city  has  grown  in  another  direction,  and 
the  terminal  may  cease  to  have  any  value  except  as  real 
estate. 

On  the  other  hand,  a  new  railroad,  built  in  a  thinly 
settled,  but  rapidly  growing  part  of  the  country,  may 
have  difficulty  in  bad  years  in  meeting  its  interest 
charges,  and  may  even  go  into  temporary  default,  but  if 
the  bonds  are  issued  at  a  low  rate  per  mile  and  the 
management  of  the  road  is  honest  and  capable,  the  safety 
of  the  principal  can  scarcely  be  questioned. 

SPECIALIZED  knowledge  and  experience  are  required 
for  the  selection  of  investments;  in  most  cases  the 
course  of  safety  lies  in  securing  the  banker's  advice. 

In  another  respect  the  services  of  a  banker  are  in- 
dispensable. The  quality  defined  above  as  safety  of 
principal  and  interest,  or  the  assurance  of  receiving  the 
principal  and  interest  on  the  dates  due,  should  never  be 
confused  with  the  prospect  of  maintaining  intact  the 
principal  sum  invested.  These  are  very  different  things, 
though  frequently  identified  in  people's  minds.  An  in- 
vestment may  possess  assured  safety  of  principal  and 
interest  and  yet  suffer  a  violent  decline  in  quoted  price, 
owing  to  a  change  in  general  business  and  financial  con- 
ditions. In  times  of  continued  business  prosperity  very 
high  rates  are  demanded  for  the  use  of  money,  because 
the  liquid  capital  of  the  country,  to  a  large  extent,  has 
been  converted  into  fixed  forms,  in  the  development  of 


SELECTING    SECURITIES 191 

new  mines,  the  building  of  new  factories  and  railroads 
and  in  the  improvement  and  extension  of  existing  proper- 
ties. These  high  rates  have  the  effect  of  reducing  the 
price  level  of  investment  securities  because  people  hav- 
ing such  securities  are  apt  to  sell  them  in  order  to  lend 
the  money  so  released. 

As  an  illustration  of  this  tendency,  New  York  City 
3%  per  cent  bonds  declined  from  110  to  90,  without 
the  slightest  suspicion  of  their  safety.  Their  inherent 
qualities  have  changed  in  no  respect  except  that  their 
prospect  of  appreciation  in  quoted  price  has  become  de- 
cidedly brighter.  Their  fall  in  price  was  due  to  two 
factors,  one  general  and  the  other  special — ^first,  the  ab- 
sorption of  liquid  capital  and  consequent  rise  in  interest 
rates,  occasioned  by  the  unprecedented  business  activity 
of  the  country,  and  second,  to  the  unfavorable  technical 
position  of  the  bonds,  due  to  an  increased  supply  in  the 
face  of  a  decreased  demand. 

If  maintaining  the  quoted  price  is  essential  the  best  in- 
vestment is  a  real  estate  mortgage,  which  is  not  quoted 
and  consequently  does  not  fluctuate.  For  the  invest- 
ment of  a  business  surplus,  however,  where  a  high  de- 
gree of  convertibility  is  required,  real  estate  mortgages 
will  not  answer,  and  the  best  way  to  guard  against 
shrinkage  is  to  purchase  a  short  term  security,  whose 
approach  to  maturity  will  maintain  the  price  close  to  par. 

A  CREDITOR  knows  that  you  ask  for  credit  because  you 
■^*'  need  it.  He  doesn't  expect  your  business  statement  to 
show  a  great  cash  surplus;  if  you  had  one,  you  would  dis- 
count his  bills.  All  he  asks  is  to  know,  how  you  stand — ju^t 
what  chance  he  and  you  together  are  taking. 

— Henry  Clews 

Founder,  Henry   Clews  &  Company 


XX 

JUDGING  THE  MONEY 
MARKET 

By  George  Garr  Henry 
Formerly  Vice-President,  Guaranty  Trust  Compaay 

NO  question  connected  with  the  investment  of  money 
is  more  important  than  the  ability  to  judge  whether 
general  market  conditions  are  favorable  for  the  purchase 
of  securities. 

After  learning  how  to  judge  the  value  of  every  form 
of  investment,  a  man  may  still  be  unsuccessful  in  the  in- 
vestment of  money  unless  he  acquires  also  a  firm  grasp 
upon  the  general  principles  which  control  the  price  move- 
ments of  securities.  This  does  not  mean  that  a  man 
needs  to  have  an  intimate  knowledge  of  technical  market 
conditions  whereby  to  estimate  temporary  fluctuations  of 
minor  importance,  but  rather  that  he  should  have  clearly 
in  mind  the  causes  which  operate  to  produce  the  larger 
swings  of  prices. 

If  an  investor  acquires  such  a  knowledge  he  is  enabled 
to  take  advantage  of  large  price  movements  in  such  a 
way  as  to  materially  increase  his  income,  and,  at  the  same 
time,  avoid  carrying  upon  his  books  securities  which  may 
have  cost  much  more  than  their  current  market  quota- 
tions. If  he  can  recognize  the  indications  which  point 
to  the  beginning  of  a  pronounced  upward  swing  in  se- 
curities, and  if  he  can  equally  recognize  the  signs  which 
indicate  that  the  movement  has  culminated,  he  can 
liquidate  the  securities  which  he  bought  at  the  inception 


THE    MONEY    MARKET 193 

of  the  rise,  or  transfer  them  to  some  short  term  issues 
whose  near  approach  to  maturity  will  render  them  stable 
in  price,  allowing  the  downward  swing  to  proceed  with- 
out disturbing  him. 

INFLUENCES  that  control  the  market  movements  of 
negotiable  securities;  how  the  ^prices  of  securities  are 
affected  by  the  'prevailing  interest  rates. 

Broadly  speaking,  the  market  movements  of  all  ne- 
gotiable securities  are  controlled  by  two  influences,  some- 
times acting  in  opposition  to  each  other  and  sometimes 
in  concert.  One  of  these  influences  is  the  loaning  rate 
of  free  capital ;  the  other  is  the  general  condition  of  busi- 
ness. A  low  rate  of  interest  or  the  likelihood  of  low 
rates  has  the  effect  of  stimulating  security  prices,  because 
banks  and  other  money-lending  institutions  are  forced 
into  the  investment  market  when  they  cannot  loan  money 
to  advantage.  Conversely,  a  high  rate  of  interest  or  the 
prospect  of  high  rates  has  the  effect  of  depressing  prices, 
because  banking  institutions  sell  their  securities  in  order 
to  lend  the  money  so  released. 

The  automatic  working  of  this  process  tends  to  pro- 
duce a  constant  adjustment  between  the  yields  upon  free 
and  invested  capital.  When  money  rates  are  low,  securi- 
ties tend  to  advance  to  the  point  where  the  return  upon 
them  is  no  greater  than  that  derived  from  the  loaning  of 
free  capital.  When  rates  are  high,  securities  tend  to  de- 
cline to  a  point  where  the  return  is  as  great.  This  ex- 
plains the  influence  of  the  first  factor. 

The  other  factor  is  the  general  condition  of  business. 
Good  business  conditions  or  the  promise  of  good  con- 
ditions tend  to  advance  security  prices,  because  they  in- 
dicate larger  earnings  and  a  stronger  financial  condition. 
Poor  business  conditions  or  an  unpromising  outlook  have 


194 FINANCE    AND    INVESTMENTS 

the  reverse  effect  for  equally  obvious  reasons. 

The  larger  movements  of  security  prices  are  always 
the  resultant  of  the  inter-action  of  these  two  forces. 
When  they  work  together  the  effect  is  irresistible,  as 
when  low  interest  rates  and  the  prospect  of  good  business 
conditions  occur  together,  or  when  high  money  rates  oc- 
cur in  the  face  of  an  indicated  falling  off  in  business 
activity.  At  such  times  all  classes  of  securities  swing  to- 
gether. For  the  most  part,  however,  money  rates  and 
business  conditions  are  opposed  in  their  influence,  rates 
being  low  when  business  is  bad  and  high  when  business 
is  good. 

Usually,  the  worse  conditions  become,  the  easier  money 
grows ;  while  the  more  active  business  becomes,  the  higher 
money  rates  rise.  The  effect  of  this  antagonism  between 
the  controlling  causes  is  to  produce  movements  of  differ- 
ent proportions  and  sometimes  in  different  directions  in 
different  classes  of  securities.  High-grade  bonds  may  be 
declining,  middle-grade  bonds  remaining  stationary  and 
poor  bonds  advancing,  all  at  the  same  time. 

This  serves  to  give  a  very  irregular  appearance  to  the 
security  markets,  and  appears  to  justify  the  widely  held 
opinion  that  security  prices  are  a  pure  matter  of  guess- 
work, and  that  they  are  controlled  only  by  manipulation 
and  special  influences.  A  clear  conception  of  the  nature 
of  the  influences  which  are  always  silently  at  work, 
reconciles  these  apparent  inconsistencies  and  makes  it 
plain  that  general  price  movements  are  determined  by 
laws  as  certain  in  their  operation  as  the  laws  of  nature. 

This  may  be  illustrated  by  a  single  example.  Let  us 
assume  that  interest  rates  are  low  and  business  conditions 
bad  with  prospect  of  still  lower  interest  rates  and  still 
more  unpromising  business  conditions.  What  will  be  the 
eft'ect  upon  different  classes  of  securities? 


THE    MONEY    MARKET 195 

High-grade  bonds,  such  as  choice  municipals,  whose 
safety  cannot  be  impaired  by  any  extent  of  depression  in 
business,  will  advance  because  their  market  price  is  in- 
fluenced almost  wholly  by  money  rates.  If  their  interest 
is  certain  to  be  paid,  no  matter  what  business  conditions 
may  become,  they  cannot  be  greatly  affected  by  a  reduc- 
tion of  earnings,  and  consequently  the  influence  of  low 
money  rates  is  left  to  act  practically  alone.  Middle- 
grade  bonds  will  remain  almost  stationary,  low  money 
rates  tending  to  advance  their  price  and  the  fear  of  de- 
creased earnings  tending  to  depress  them.  The  lowest 
grade  of  bonds  and  stocks,  whose  margin  of  security  even 
in  good  times  is  not  very  great,  will  probably  suffer  in 
price  because  the  fear  of  default  in  interest  and  of  re- 
duction in  dividends  will  operate  much  more  strongly 
than  the  mere  stimulus  of  low  interest  rates. 

Of  course,  securities  cannot  be  clearly  separated  into 
these  three  classes,  but  shade  imperceptibly  into  one 
another.  The  classification  is  adopted  only  for  purpose 
of  illustration. 

INDICATIONS  based  upon  close  observations  of  past 
financial  movements  enable  investors  to  forecast  the 
direction  of  general  swings  in  the  market  prices. 

Up  to  this  point  we  have  been  concerned  merely  in 
showing  that  the  market  movements  of  negotiable  securi- 
ties are  controlled  by  the  influence  of  certain  factors.  A 
more  important  question  now  remains  to  be  considered: 
whether  the  effect  of  these  two  influences  is  to  produce 
general  swings  in  prices  which  may  be  depended  upon 
with  comparative  certainty,  and,  if  so,  what  indications 
are  afforded  to  the  investor  of  the  commencement  or  cul- 
mination of  such  a  movement.  The  answer  must  be  that 
the  combined  effect  of  the  two  influences  described  is  to 


196 FINANCE    AND    INVESTMENTS 

produce  definite  and  regular  swings  in  prices,  and  that 
the  indications  which  define  the  movements  are  not  diffi- 
cult to  follow. 

A  general  survey  of  the  history  of  every  industrial  na- 
tion reveals  the  fact  that  the  business  conditions  undergo 
alternate  periods  of  prosperity  and  depression  extending 
in  clearly  defined  cycles  of  substantially  uniform  length. 
By  tracing  the  usual  course  of  interest  rates  and  of  busi- 
ness conditions  throughout  one  of  these  cycles,  a  general 
idea  can  be  formed  of  the  way  in  which  the  joint  influ- 
ences operate  to  produce  price  movements. 

Immediately  after  a  financial  crisis,  which  usually 
closes  an  era  of  business  prosperity,  money  rates  become 
abnormally  easy.  Soon  after  the  climax  of  the  crisis, 
money  accumulates  in  enormous  volume  in  financial  cen- 
ters. This  is  caused  by  the  great  diminution  of  business 
activity  which  renders  unnecessary  a  large  pert  of  the 
circulating  medium  which  was  required  to  transact  the 
greater  volume  of  business  which  formerly  prevailed. 
To  the  extent  to  which  this  accumulation  of  money 
merely  reflects  a  redundancy  of  currency  as  distinguished 
from  real  liquid  capital  it  can  have  little  effect  in  en- 
couraging the  resumption  of  business  activity.  As  time 
passes,  however,  and  economies  in  operation  commence 
to  make  themselves  manifest,  and  especially  as  waste  and 
extravagance  are  curtailed,  the  country  as  a  whole  com- 
mences to  accumulate  real  liquid  capital ;  that  is  to  say, 
its  total  production  leaves  a  surplus  over  the  amount  of 
consumption. 

In  the  state  of  business  feeling  which  has  been  pic- 
tured, the  undertaking  of  new  business  ventures  or  ad- 
ditions to  existing  properties  would  not  be  approved, 
so  that  the  surplus  wealth  created  finds  its  way  into 
bank  deposits  as  liquid  capital.    The  competitive  attempt 


H.  P.  DAVISON 

of  J.  p.  Morgan  &  Company 


PART  I-ORGANIZING 
CREDIT  WORK 

The  Path  to  Power 

T^HE  only  genuine  power  which  an  individual, 
or  a  group  of  individuals,  can  gain  is  that 
arising  from  the  confidence  reposed  in  him  or 
them  by  the  community. 

Every  town,  large  or  small,  seems  to  choose  a 
limited  number  of  men  (merchants,  manufac- 
turers, lawj^ers  and  bankers)  to  represent  it  in 
the  management  of  its  chief  local  industries. 
Those  men  are  entrusted  with  such  heavy  re- 
sponsibilities because  of  the  confidence  which  their 
records  have  established,  and  only  so  long  as  their 
records  are  unblemished  do  they  retain  such  trusts. 

These  are  axioms  which  it  seems  almost  idle  to 
repeat.  They  apply  to  all  business,  but  more 
emphatically,  I  believe,  to  banking  than  to  any 
other  form  of  commerce. 

To  banking  the  confidence  of  the  community 
is  the  breath  from  which  it  draws  its  life.  The 
past  is  full  of  examples  where  the  slightest  sus- 
picion as  to  the  conservatism  or  the  methods  of  a 
bank's  management  has  destroyed  confidence  and 
drawn  away  its  deposits  over  night.  Much,  there- 
fore, may  be  left  to  the  instinct  and  the  force  of 
public  opinion. 


THE    MONEY    MARKET 197 

to  loan  this  capital  at  the  time  when  borrowers  are  few 
produces  merely  nominal  interest  rates.  This  continues 
for  some  time.  It  is  only  gradually  as  confidence  returns 
and  as  the  spirit  of  initiative  begins  to  reassert  itself, 
that  some  part  of  the  liquid  capital  created  each  year  is 
diverted  into  fixed  forms.  Here  and  there  some  enter- 
prising group  of  men  will  develop  a  mine,  lay  a  new 
piece  of  railway  or  make  some  addition  to  an  existing 
undertaking.  For  some  length  of  timcy  however,  the 
liquid  capital  of  the  country  not  only  remains  unim- 
paired, but  is  continually  increasing.  After  a  time  a 
change  comes.  The  annual  surplus  of  production,  though 
larger  than  before,  is  only  sufficient  to  provide  for  the 
new  undertakings  which  the  growing  optimism  demands. 
Interest  rates  rise  moderately  in  response  to  the  added 
demand  for  capital. 

GENERAL  conditions  that  follow  the  culmination  of 
a  financial  crisis;  the  immediate  effects  on  business 
conditions^  capital  and  rates  of  interest. 

A  few  years  further  along,  as  business  activity  in- 
creases and  success  appears  plainly  to  wait  upon  new 
ventures,  the  demand  for  new  capital  with  which  to  de- 
velop increased  facilities  and  new  enterprises  exceeds 
the  annual  supply  of  wealth  created.  The  spirit  of 
economy  and  thrift  which  had  prevailed  throughout  the 
years  of  depression  gives  place  to  extravagance,  the  de- 
mand for  luxuries,  and  other  unproductive  forms  of  ex- 
penditure. While  the  total  production  is  much  greater 
than  in  the  lean  years,  the  margin  of  production  is  not 
proportionately  as  great,  and  this  amount  is  insufficient 
to  meet  the  demands  upon  it.  The  supplies  of  liquid 
capital  stored  up  during  the  years  of  depression  are  re- 
sorted to  and  they  serve  to  provide  the  new  capital  for  a 


198 FINANCE    AND    INVESTMENTS 

few  additional  years.  Interest  rates  at  once  reflect  the 
encroachment  upon  stored  up  capital  and  their  rise  gives 
the  first  real  warning  of  the  country's  true  position. 

The  optimistic  business  men  do  not  heed  the  warning. 
After  exhausting  all  the  real  capital  available  in  the 
country,  they  proceed  to  borrow  extensively  from  foreign- 
ers. Every  step  which  can  be  taken  to  induce  foreigners 
to  part  with  their  capital  is  resorted  to.  If  they  will  not 
buy  long  term  bonds,  short  term  notes  are  created.  If 
they  refuse  these,  they  are  asked  to  make  loans  secured 
by  the  new  bonds  and  notes. 

Finally  the  day  of  reckoning  arrives,  when  some  in- 
cident, usually  unimportant  in  itself,  first  suggests  to  the 
lenders  of  money  that  their  debtors  whom  they  know  to 
be  over-extended  may  not  be  able  to  pay  their  loans.  The 
attempt  to  collect  their  loans  produces  a  financial  crisis 
which  brings  to  an  end  the  period  of  prosperity. 

The  foregoing  is  a  description  of  the  more  important 
stages  through  which  business  conditions  pass  from  crisis 
to  crisis.  Different  cycles  vary  in  particular  details,  but 
all  agree  in  essential  outlines.  Sometimes  special  influ- 
ences are  at  work  which  operate  to  shorten  or  prolong 
the  cycle.  The  approach  of  a  crisis  will  be  retarded  by 
inflation  of  currency,  for  the  excess  finds  its  way  into 
bank  vaults  and  increases  the  volume  of  loanable  credit. 

The  effect  of  such  inflation,  however,  is  wholly  dis- 
astrous, because  the  addition  to  the  supply  of  capital  is 
fictitious,  not  real,  and  only  defers  the  day  of  reckoning 
for  a  greater  catastrophe.  On  the  other  hand  the  ap- 
proach of  a  crisis  can  be  greatly  hastened  by  wars,  con- 
flagrations, and  other  agencies  which  destroy  capital, 
and  by  attacks  upon  capital  and  conduct  of  corporate 
business,  for  such  attacks  tend  to  render  capital  timid 
and  produce  the  same  effect  as  a  violent  curtailment  of 


THE    MONEY    MARKET 19S; 

the  supply.  These  are  only  some  of  the  many  influences 
which  might  become  operative,  but  they  serve  to  show 
the  necessity  for  careful  consideration  of  all  the  factors 
at  work,  if  a  true  conception  of  the  conditions  and 
tendencies  of  business  is  to  be  formed. 

Business  conditions  remain  poor  or  grow  worse  for  a 
few  years  after  a  crisis.  Liquidation  is  taking  place, 
prices  are  going  down  and  the  uncertainty  of  the  outlook 
causes  diminished  activity.  Thereafter,  however,  condi- 
tions improve  and  activity  increases  with  fair  uniformity 
until  it  reaches  the  high  tension  of  the  period  immedi- 
ately preceding  the  crisis.  The  course  of  interest  rates 
and  the  course  of  business  conditions  may  both  be  de- 
flected by  the  operation  of  special  influences,  but  the  gen- 
eral tendencies  are  substantially  as  outlined.  The  result 
of  the  operation  of  these  joint  factors  may  be  traced  in 
the  market  movements  of  any  class  of  security  desired. 

For  the  sake  of  simplicity,  let  us  consider  the  effect  of 
the  market  swings  on  the  highest  grade  of  investment 
issues  and  on  the  lowest  grade,  those  which  are  affected 
only  by  money  rates  and  those  which  are  affected  almost 
Wholly  by  business  conditions. 

Emerging  from  the  strain  of  the  crisis  at  their  lowest 
point,  high-grade  bonds,  such  as  the  best  municipal  and 
railroad  issues,  advance  rapidly  as  interest  rates  decline, 
continuing  their  advancing  tendency  throughout  the 
period  of  business  depression  which  follows  upon  the 
heels  of  the  crisis.  As  business  conditions  improve,  their 
position,  while  perfectly  secure  before,  is  further 
strengthened  and  an  added  stimulus  is  given  to  their 
rise.  About  the  middle  of  the  cycle  when  the  business 
outlook  is  very  promising,  and  before  interest  rates  have 
sustained  any  material  advance  the  prices  of  the  best 
bonds  are  usually  at  their  highest  point.     From  that 


800 FINANCE    AND    INVESTMENTS 

time  forward  they  commence  to  decline,  in  spite  of  the 
increasing  prosperity  of  the  country,  under  the  influ- 
ence of  rising  money  rates.  They  make  their  lowest 
prices  in  the  midst  of  the  crisis,  when  the  strain  upon 
capital  is  greatest. 

The  lowest  grade  of  bonds,  on  the  other  hand  (whose 
margin  of  security  is  least),  do  not  commence  to  recover 
materially  in  price,  in  spite  of  the  influence  of  low 
money  rates  during  the  hard  times  which  follow  the 
crisis,  the  influence  of  reduced  earnings  and  the  fear  of 
default  holding  them  in  check.  As  the  outlook  becomes 
brighter  they  advance  rapidly  and  continue  to  improve 
in  price  so  long  as  they  yield  more  than  current  money 
rates.  At  some  point  difficult  to  determine  in  advance 
but  usually  well  along  toward  the  end  of  the  cycle  they 
reach  their  high  point  and  thereafter  decline  under  the 
influence  of  the  growing  stringency  in  money. 

Between  these  two  extremes,  every  class  of  security  is 
to  be  found.  The  better  ones  will  tend  to  resemble,  in 
their  market  movements,  the  course  pursued  by  the 
choicest  bonds ;  the  poor  ones  will  approximate  the  lowest 
class.  In  every  case,  however,  unless  special  influences 
operate  to  produce  variations,  the  market  swing  of  a 
given  security  should  be  easily  conjectured  by  an  in- 
vestor who  gives  careful  attention  to  the  relative  weight 
which  is  likely  to  attach  to  each  determining  influence. 


'T'HE  true  credit  of  commerce  is  that  built  only  through  fair 
^  representation.     This  is  the  credit  that  stimulates  induS' 
try,  inspires  confidence,  and  creates  a  healthy  activity. 

— Henry  Clews 

Founder,  Henry  Clews  &  Company 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 
BERKELEY 

Return  to  desk  from  which  borrowed. 
This  book  is  DUE  on  the  last  date  stamped  below. 


23  1948 


yn 


DEC12B85 


LD  21-100m-9/4T(A5702sl6)476 


UNIVERSITY  OF  CAUFORNIA  LIBRARY 


